What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2020-12-03 compared with 2019-12-06 · 865 added, 742 removed, 779 unchanged (67% of the section changed)

2 unchanged sentences

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020, pursuant to Exchange Act Rule 13a-15.

Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2019 were effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer

concluded that our disclosure controls and procedures as of September 30, 2020 were effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) or 15d-15(d) that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) or 15d-15(d) that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As we continue the process to adopt ASU 2016-02, Leases (Topic 842), we expect that there will be additional changes in internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting and our Independent Registered Public Accounting Firm’s report with respect to the effectiveness of our internal control over financial reporting are included on pages F-2 and F-3, respectively, of this Report on Form 10-K.

Report of Management on Internal Control Over Financial Reporting and Attestation Report of Independent Registered Public Accounting Firm

Management’s Report on Internal Control Over Financial Reporting and the attestation report of our Independent Registered Public Accounting Firm with respect to the effectiveness of our internal control over financial reporting are included on pages F-2 and F-3, respectively, of this Annual Report on Form 10-K.

Limitations on Effectiveness of Controls and Procedures

12 unchanged sentences

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth in our proxy statement for the 2020 Annual Meeting of Stockholders under the headings “Election of Directors”;

“Corporate Governance and Related Matters”;

“Code of Conduct”;

“Corporate Governance Guidelines” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Information regarding executive officers of the Company is set forth under the caption “Executive Officers of Universal Technical Institute, Inc.” in Part I hereof.

Below is a list of our Executive Officers and Board of Directors as of the year ended September 30, 2020:

Executive Officer Position

Grant Chief Executive Officer

Anderson Executive Vice President and Chief Financial Officer

Smith Executive Vice President, Campus Operations & Services

Fesperman Senior Vice President, Chief Commercial Officer

Hitchcock Senior Vice President, Chief Strategy and Transformation Officer

Christopher E.

Kevane Senior Vice President, Chief Legal Officer

Mason Senior Vice President, Chief Human Resources Officer

Severson Senior Vice President, Admissions

Smith Senior Vice President, Chief Information Officer

Director Position

DeVincenzi Chairman of the Board, Universal Technical Institute, Inc.;

Principal Partner, Lupine Venture Group

Blaszkiewicz President and Chief Executive Officer, Invest Detroit

Brochick Executive Vice President - Strategic Development, Penske Automotive Group, Inc.

Grant Chief Executive Officer, Universal Technical Institute, Inc.

LTG (R) William J.

Lennox Former Superindendent of the United States Military Academy at West Point;

Chief Executive Officer, Lennox Strategies, LLC

McWaters Former President and Chief Executive Officer, Universal Technical Institute, Inc.

Former United States Secretary of Education

Christopher S.

Shackelton Managing Partner, Coliseum Capital Management, LLC

Srere Former President, Young and Rubicam Advertising

Trammell Former Executive Vice President and Chief Financial Officer, Tenneco Inc.

Former Chairman of the Board, Universal Technical Institute, Inc.

(1) Effective as of November 30, 2020, Dr.

Paige and Mr.

White each voluntarily retired from our board of directors.

The information required by this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of fiscal year ended September 30, 2020.

EXECUTIVE COMPENSATION

The information set forth in our proxy statement for the 2020 Annual Meeting of Stockholders under the heading “Executive Compensation" and “Compensation Committee Report” is incorporated herein by reference.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth in our proxy statement for the 2020 Annual Meeting of Stockholders under the headings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information set forth in our proxy statement for the 2020 Annual Meeting of Stockholders under the heading “Certain Relationships and Related Transactions” and “Corporate Governance and Related Matters” is incorporated herein by reference.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth in our proxy statement for the 2020 Annual Meeting of Stockholders under the heading “Audit Fees and Audit-Related Fees” and “Audit Committee Pre-Approval Procedures for Services Provided by the Independent Registered Public Accounting Firm” is incorporated herein by reference.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Annual Report on Form 10-K:

(a) Documents filed as part of this Annual Report on Form 10-K:

(1) The financial statements required to be included in this Annual Report on Form 10-K are included in Item 8 of this Report.

(2) All other schedules have been omitted because they are not required, are not applicable, or the required information is shown on the financial statements or the notes thereto.

Exhibit Number

(3) Exhibits:

Exhibit Number Description

3.1 Restated Certificate of Incorporation of the Registrant.

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(Incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant on February 21, 2017.)

Exhibit Number

4.6+ Description of Securities.

10.1* Universal Technical Institute Executive Benefit Plan, effective March 1, 1997.

12 unchanged sentences

(Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on September 10, 2014.)

Exhibit Number Description

10.4.3* Form of Performance Unit Award Agreement.

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McWaters, as amended.

(Filed herewith.)

(Incorporated by reference to Exhibit 10.16 to the Form 10-K filed by the Registrant on December 6, 2019.)

10.17* Employment Agreement, dated November 1, 2019, by and between the Registrant and Jerome A.

1 unchanged sentence

21.1+ Subsidiaries of the Registrant.

(Filed herewith.)

23.1+ Consent of Deloitte & Touche LLP.

(Filed herewith.)

24.1 Power of Attorney.

1 unchanged sentence

31.1+ Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(Filed herewith.)

31.2+ Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(Filed herewith.)

32.1+ Certification of Chief Executive Officer pursuant to 18 U.S.C.

§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(Filed herewith.)

32.2+ Certification of Chief Financial Officer pursuant to 18 U.S.C.

§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(Filed herewith.)

The following financial information from our Annual Report on Form 10-K for the year ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL):

(i) Consolidated Balance Sheets;

(ii) Consolidated Statements of Loss;

(iii) Condensed Consolidated Statements of Comprehensive Loss;

(iv) Consolidated Statements of Shareholders’ Equity;

(v) Consolidated Statements of Cash Flows;

and (vi) Notes to Consolidated Financial Statements.

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema Document.

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit Number Description

101.LAB XBRL Taxonomy Extension Label Linkbase Document.

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

* Indicates a contract with management or compensatory plan or arrangement.

+ Filed herewith.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

December 6, 2019

UNIVERSAL TECHNICAL INSTITUTE, INC.

December 3, 2020 UNIVERSAL TECHNICAL INSTITUTE, INC.

/s/ Jerome A.

Chief Executive Officer

Grant, Chief Executive Officer

POWER OF ATTORNEY

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

SIGNATURE TITLE DATE

/s/ Jerome A.

Chief Executive Officer (Principal Executive Officer)

December 6, 2019

Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

December 6, 2019

Chief Executive Officer (Principal Executive Officer) December 3, 2020

Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) December 3, 2020

/s/ Robert T.

Chairman of the Board

December 6, 2019

Chairman of the Board December 3, 2020

Director December 3, 2020

/s/ George W.

Brochick Director December 3, 2020

/s/ William J.

December 6, 2019

Director December 3, 2020

/s/ Kimberly J.

December 6, 2019

Director December 3, 2020

/s/ Christopher S.

Director December 3, 2020

Christopher S.

December 6, 2019

Director December 3, 2020

/s/ Kenneth R.

December 6, 2019

Director December 3, 2020

UNIVERSAL TECHNICAL INSTITUTE, INC.

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Consolidated Balance Sheets as of September 30, 2020 and 2019

Consolidated Statements of Loss for the years ended September 30, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Loss for the years ended September 30, 2019, 2018 and 2017

Consolidated Statements of Operations for the years ended September 30, 2020, 2019 and 2018

Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2020, 2019 and 2018

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Universal Technical Institute, Inc.

To the shareholders and the Board of Directors of Universal Technical Institute, Inc.

Opinion on Internal Control over Financial Reporting

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2020, of the Company and our report dated December 3, 2020 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in method of accounting for leases as a result of the adoption of Accounting Standards Codification Topic 842, Leases, effective October 1, 2019.

Basis for Opinion

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Universal Technical Institute, Inc.

To the shareholders and the Board of Directors of Universal Technical Institute, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Universal Technical Institute, Inc.

and subsidiaries (the "Company") as of September 30, 2019 and 2018, the related consolidated statements of loss, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes.

and subsidiaries (the "Company") as of September 30, 2020 and 2019, the related consolidated statements of operations, of shareholders’ equity, and of cash flows for each of the three years in the period ended September 30, 2020, and the related notes (“collectively referred to financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 3, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, effective October 1, 2019, the Company adopted FASB ASC 842, Leases , using the modified retrospective approach.

Basis for Opinion

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CONSOLIDATED BALANCE SHEETS

September 30, 2019

September 30, 2018

(In thousands)

Current assets:

(In thousands, except par value and per share amounts)

September 30, 2020 September 30, 2019

Cash and cash equivalents $ 76,803 $ 65,442

Restricted cash 12,116 15,113

Held-to-maturity investments 38,055 —

Receivables, net 35,411 17,937

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Property and equipment, net 72,743 104,126

Goodwill 8,222 8,222

Notes receivable, less current portion 27,609 29,852

Right-of-use assets for operating leases 144,663 —

Other assets 8,565 10,222

Total assets $ 441,981 $ 270,526

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable and accrued expenses $ 51,891 $ 45,878

1 unchanged sentence

Accrued tool sets 3,148 2,586

Operating lease liability, current portion 23,666 —

Financing obligation, current — 1,554

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Financing obligation — 39,161

Operating lease liability 134,089 —

Other liabilities 9,056 9,578

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Shareholders’ equity:

Common stock, $0.0001 par value, 100,000,000 shares authorized, 32,498,830 shares issued and 25,633,933 shares outstanding as of September 30, 2019 and 32,168,795 shares issued and 25,303,898 shares outstanding as of September 30, 2018

Common stock, $ 0.0001 par value, 100,000 shares authorized, 32,730 and 32,499 shares issued, and 32,647 and 25,634 shares outstanding as of September 30, 2020 and 2019, respectively

Preferred stock, $ 0.0001 par value, 10,000 shares authorized;

700,000 shares of Series A Convertible Preferred Stock issued and outstanding as of September 30, 2019 and September 30, 2018, liquidation preference of $100 per share

700 shares of Series A Convertible Preferred Stock issued and outstanding as of September 30, 2020 and 2019, liquidation preference of $ 100 per share

Paid-in capital - common 141,002 187,493

Paid-in capital - preferred 68,853 68,853

Treasury stock, at cost, 6,864,897 shares as of September 30, 2019 and September 30, 2018

Treasury stock, at cost, 82 and 6,865 shares as of September 30, 2020 and 2019, respectively

( 365 ) ( 97,388 )

Retained deficit ( 32,971 ) ( 44,673 )

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS

Year Ended September 30,

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Year Ended September 30,

2020 2019 2018

Revenues $ 300,761 $ 331,504 $ 316,965

Operating expenses:

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Equity in earnings of unconsolidated affiliate — 399 385

Other income 135 1,467 1,078

Total other income (expense), net 1,277 137 ( 422 )

Loss before income taxes ( 2,594 ) ( 7,665 ) ( 35,697 )

Income tax expense (benefit)

Income tax benefit (expense) 10,602 ( 203 ) 3,015

Net income (loss) $ 8,008 $ ( 7,868 ) $ ( 32,682 )

Preferred stock dividends 5,264 5,250 5,250

Loss available for distribution

Loss per share:

Net loss per share - basic

Net loss per share - diluted

Income (loss) available for distribution $ 2,744 $ ( 13,118 ) $ ( 37,932 )

Earnings per share (See Note 17):

Net income (loss) per share - basic $ 0.05 $ ( 0.52 ) $ ( 1.51 )

Net income (loss) per share - diluted $ 0.05 $ ( 0.52 ) $ ( 1.51 )

Weighted average number of shares outstanding:

The accompanying notes are an integral part of these consolidated financial statements.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Year Ended September 30,

(In thousands)

Other comprehensive loss (net of tax):

Equity interest in investee's unrealized losses on hedging derivatives, net of taxes (1)

Comprehensive loss

(1) The tax effect during the years ended September 30, 2019 , 2018 , and 2017 was not material.

Basic 29,812 25,438 25,115

Diluted 30,113 25,438 25,115

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Preferred Stock

Capital - Common

Capital - Preferred

Treasury Stock

Earnings (Deficit)

Accumulated Other Comprehensive Income

Shareholders’

(In thousands)

Common Stock Preferred Stock Paid-in

Capital - Common Paid-in

Capital - Preferred Treasury Stock Retained

Earnings (Deficit) Total

Shareholders’

Shares Amount Shares Amount Shares Amount

Balance as of September 30, 2017 31,872 $ 3 700 $ — $ 185,140 $ 68,853 ( 6,865 ) $ ( 97,388 ) $ ( 30,832 ) $ 125,776

Issuance of Series A Convertible Preferred Stock

Adjustment for the adoption of ASC 606 — — — — — — — — 37,209 37,209

Net loss — — — — — — — — ( 32,682 ) ( 32,682 )

Issuance of common stock under employee plans 379 — — — — — — — — —

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Preferred stock cash dividends declared — — — — — — — — ( 5,250 ) ( 5,250 )

Equity interest in investee's unrealized losses on hedging derivatives, net of taxes

Balance as of September 30, 2018 32,169 $ 3 700 $ — $ 186,732 $ 68,853 ( 6,865 ) $ ( 97,388 ) $ ( 31,555 ) $ 126,645

Cumulative-effect adjustment (1)

Net loss — — — — — — — — ( 7,868 ) ( 7,868 )

Issuance of common stock under employee plans 465 — — — — — — — — —

3 unchanged sentences

Balance as of September 30, 2019 32,499 $ 3 700 $ — $ 187,493 $ 68,853 ( 6,865 ) $ ( 97,388 ) $ ( 44,673 ) $ 114,288

Adjustment for the adoption of ASC 842 — — — — — — — — 8,958 8,958

Net income — — — — — — — — 8,008 8,008

Issuance of common stock under employee plans 328 — — — — — — — — —

1 unchanged sentence

Stock-based compensation — — — — 2,077 — — — — 2,077

Shares issued for equity offering — — — — ( 47,870 ) — 6,783 97,023 — 49,153

Preferred stock cash dividends declared — — — — — — — — ( 5,264 ) ( 5,264 )

Balance as of September 30, 2020 32,730 $ 3 700 $ — $ 141,002 $ 68,853 ( 82 ) $ ( 365 ) $ ( 32,971 ) $ 176,522

(1) The cumulative-effect adjustment is from the adoption of ASC 606.

The accompanying notes are an integral part of these consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended September 30,

(In thousands)

Year Ended September 30,

2020 2019 2018

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Net income (loss) $ 8,008 $ ( 7,868 ) $ ( 32,682 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization 11,804 13,222 13,006

Amortization of assets subject to financing obligation — 2,682 2,682

Amortization of right-of-use assets for operating leases 24,273 — —

Goodwill and intangible asset impairment expense — — 1,164

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Changes in assets and liabilities:

Receivables ( 13,749 ) ( 1,483 ) ( 2,695 )

Notes receivable 2,286 1,298 3,393

Prepaid expenses and other current assets ( 1,016 ) 3,157 ( 1,584 )

Other assets ( 76 ) 1,016 ( 116 )

Accounts payable and accrued expenses 7,020 2,942 3,858

Deferred revenue ( 2,192 ) 4,650 ( 5,663 )

Income tax payable/receivable

Income tax (receivable) payable ( 6,989 ) 166 ( 812 )

Accrued tool sets and other current liabilities 1,863 300 1,014

Deferred rent liability — ( 1,677 ) 5,116

Operating lease liability ( 25,617 ) — —

Other liabilities 739 321 ( 318 )

5 unchanged sentences

Proceeds received upon maturity of investments 31,289 — 7,739

Proceeds from life insurance policy 1,566 — —

Purchase of trading securities — — ( 894 )

2 unchanged sentences

Return of capital contribution from unconsolidated affiliate 261 267 291

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities ( 45,760 ) ( 6,152 ) 27,132

Cash flows from financing activities:

Payment of preferred stock dividend

Repayment of financing obligation

Proceeds from equity offering 49,153 — —

Payment of preferred stock cash dividend ( 5,264 ) ( 5,250 ) ( 5,250 )

Payment of financing obligation and finance leases ( 99 ) ( 1,319 ) ( 1,107 )

Payment of payroll taxes on stock-based compensation through shares withheld ( 698 ) ( 629 ) ( 223 )

Net cash used in financing activities

Net cash provided by (used in) financing activities 43,092 ( 7,198 ) ( 6,580 )

Change in cash, cash equivalents and restricted cash 8,364 8,396 7,199

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash and cash equivalents, beginning of period 65,442 58,104 50,138

Restricted cash, beginning of period 15,113 14,055 14,822

Cash, cash equivalents and restricted cash, beginning of period 80,555 72,159 64,960

Cash and cash equivalents, end of period 76,803 65,442 58,104

Restricted cash, end of period 12,116 15,113 14,055

Cash, cash equivalents and restricted cash, end of period $ 88,919 $ 80,555 $ 72,159

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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Year Ended September 30,

(In thousands)

Year Ended September 30,

2020 2019 2018

Supplemental disclosure of cash flow information:

Taxes (refunded) paid $ ( 113 ) $ 37 $ 610

Interest paid 7 3,220 3,310

2 unchanged sentences

Change in accrued capital expenditures during the period ( 490 ) 316 ( 1,042 )

Vesting of stock based compensation liability

CARES Act funds received for student emergency grants (See Note 21) 16,565 — —

CARES Act funds disbursed for student emergency grants (See Note 21) ( 17,184 ) — —

CARES Act funds received for institutional costs (See Note 21) 13,889 — —

CARES Act funds for institutional costs included in Receivables, net (See Note 21) 1,797 — —

The accompanying notes are an integral part of these consolidated financial statements.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Business Description

(In thousands, except per share amounts)

Note 1 - Business Description

Universal Technical Institute, Inc.

(“UTI” or, collectively, “we”, "us" and “our”) provides postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as well as welders and CNC machining technicians.

We offer certificate, diploma or degree programs at 13 campuses and advanced training programs that are sponsored by the manufacturer or dealer at certain campuses and dedicated training centers.

We work closely with leading OEMs and employers to understand their needs for qualified service professionals.

(“we,” “us” or “our”) is the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average full-time enrollment and graduates.

We also provide programs for welders and computer numeric control (“CNC”) machining technicians.

We offer certificate, diploma or degree programs at 12 campuses across the United States under the banner of several well-known brands, including Universal Technical Institute, Motorcycle Mechanics Institute, Marine Mechanics Institute and NASCAR Technical Institute.

This excludes the Norwood, Massachusetts campus that was closed on July 31, 2020.

We also offer manufacturer specific advanced training (“MSAT”) programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers.

Founded in 1965, we have provided technical education for more than 55 years and have graduated more than 220,000 technicians.

We work closely with over 35 original equipment manufacturers and industry brand partners to understand their needs for qualified service professionals.

Revenues generated from our schools consist primarily of tuition and fees paid by students.

To pay for a substantial portion of their tuition, the majority of students rely on funds received from federal financial aid programs under Title IV Programs of the Higher Education Act of 1965, as amended (HEA), as well as various veterans' benefits programs.

For further discussion, see "Concentration of Risk" under Note 2 and Note 18 “Governmental Regulation and Financial Aid”.

Summary of Significant Accounting Policies

To pay for a substantial portion of their tuition, the majority of students rely on funds received from federal financial aid programs under Title IV Programs of the Higher Education Act of 1965, as amended (“HEA”), as well as from various veterans benefits programs.

For further discussion, see Note 2 on “Summary of Significant Accounting Policies - Concentration of Risk” and Note 20 on “Government Regulation and Financial Aid.”

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

(In thousands, except per share amounts)

Through our proprietary loan program, we, in substance, provide the students who participate in this program with extended payment terms for a portion of their tuition.

20 unchanged sentences

Each reporting period, we update our assessment of the variable collection rate associated with the proprietary loan program.

Prior to adopting ASC 606, we recognized revenue related to the proprietary loan program as cash was received.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Prior to adopting ASC 606 on October 1, 2017, we recognized revenue related to the proprietary loan program as cash was received.

Restricted Cash

2 unchanged sentences

We maintain an allowance for uncollectible accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments.

We offer a variety of payment plans to help students pay that portion of their education expenses not covered by financial aid programs or alternate fund sources, which are unsecured and not guaranteed.

We offer a variety of payment plans to help students pay that portion of their education

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

expenses not covered by financial aid programs or alternate fund sources, which are unsecured and not guaranteed.

Management analyzes accounts receivable, historical percentages of uncollectible accounts, customer credit worthiness and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts.

14 unchanged sentences

There were no significant impairment charges required for the years ended September 30, 2020, 2019 and 2018.

Our goodwill balance of $ 8.2 million resulted from the acquisition of our motorcycle and marine education business in 1998 and is allocated to our MMI Orlando, Florida campus that provides the related educational programs.

Goodwill represents the excess of the cost of an acquired business over the estimated fair values of the assets acquired and liabilities assumed.

1 unchanged sentence

Any resulting impairment charge would be recognized as an expense in the period in which impairment is identified.

Our goodwill balance of $8.2 million resulted from the acquisition of our motorcycle and marine education business in 1998 and is allocated to our MMI Orlando, Florida campus that provides the related educational

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

During the year ended September 30, 2019, we utilized a discounted cash flow model that incorporated estimated future cash flows for the next five years and an associated terminal value to determine the fair value of our MMI Orlando, Florida campus.

Key management assumptions included in the cash flow model included future tuition revenues, operating costs, working capital changes, capital expenditures and a discount rate.

Based upon our annual assessments, we determined that our goodwill was not impaired as of September 30, 2019 and that impairment charges were not required.

On March 19, 2020, we suspended all in person classes at all of our campuses, including our Orlando, Florida campus, for the safety and protection of our students and staff, to help slow the spread of COVID-19, and to comply with state and local orders and restrictions.

On March 25, 2020, we began offering the classroom portion of our training online so that students who elected to remain enrolled in the program could continue their education from home.

During May of 2020, our Orlando, Florida campus reopened for students to complete hands-on labs, which have been re-designed to meet CDC, state and local guidelines for health, safety and social distancing.

While some student graduation dates have been delayed due to the closure, the average students enrolled at our Orlando, Florida campus only decreased by 3.8 % as compared to the prior year.

Even with the impacts of COVID-19, our new student enrollments at the Orlando, Florida campus increased by 3.4 % during 2020 over the prior year.

After performing a qualitative analysis, there were no indicators of goodwill impairment as of September 30, 2020.

Self-Insurance Plans

3 unchanged sentences

Our recorded net liability related to self-insurance plans was $ 3.4 million as of September 30, 2020.

Deferred Rent Liability

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(In thousands, except per share amounts)

We lease the majority of our administrative and educational facilities under operating lease agreements.

Some lease agreements contain tenant improvement allowances, free rent periods or rent escalation clauses.

In instances where one or more of these items are included in a lease agreement, we record a deferred rent liability on the consolidated balance sheet and record rent expense evenly over the term of the lease.

Upon adoption of Accounting Standards Codification Topic 842, Leases (“ASC 842”) as of October 1, 2019, we derecognized our previously recorded deferred rent balance.

ASC 842 requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.

We adopted ASC 842 under a modified retrospective method without the recasting of comparative periods’ financial information.

See Note 3 “Recent Accounting Pronouncements” for further detail regarding the adoption of ASC 842 and the impact on our financial statements and Note 10 “Leases” for our fiscal 2020 disclosures.

Advertising Costs

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We recognize the compensation expense for restricted stock awards and restricted stock units with only service conditions on a straight-line basis over the requisite service period.

We granted stock options (which vested upon issuance) and no restricted stock during the year ended September 30, 2019.

We did not grant stock options or restricted stock awards during the years ended September 30, 2018 and 2017 , respectively.

We granted restricted stock awards with both service and performance conditions during the year ended September 30, 2020.

We did not grant any stock options during the year ended September 30, 2020.

Shares issued under our equity compensation plans are new shares.

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Treasury bill that is commensurate with each measurement period, and we assume that any dividends paid were reinvested.

Stock-based compensation expense of $1.4 million , $1.9 million and $3.0 million (pre-tax) was recorded for the years ended September 30, 2019 , 2018 and 2017 , respectively.

The tax benefit related to stock-based

UNIVERSAL TECHNICAL INSTITUTE, INC.

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($’s in thousands, except per share amounts)

compensation recognized was $0.4 million , $0.5 million and $1.1 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

Stock-based compensation expense of $ 2.1 million, $ 1.4 million and $ 1.9 million was recorded for the years ended September 30, 2020, 2019 and 2018, respectively.

The tax benefit related to stock-based compensation recognized was $ 0.5 million, $ 0.4 million, and $ 0.5 million for the years ended September 30, 2020, 2019 and 2018, respectively.

See Note 14 for further discussion.

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Deferred tax assets are reduced through a valuation allowance if it is more likely than not that the deferred tax assets will not be realized.

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(In thousands, except per share amounts)

Concentration of Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, investments and receivables.

As of September 30, 2019 , we held cash and cash equivalents of $65.4 million , restricted cash of $15.1 million and no investments.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, short-term investments and receivables.

As of September 30, 2020, we held cash and cash equivalents of $ 76.8 million, restricted cash of $ 12.1 million and short-term held-to-maturity investments of $ 38.1 million.

We place our cash and cash equivalents and restricted cash with high quality financial institutions and limit the amount of credit exposure with any one financial institution.

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We mitigate the risk associated with our investment in corporate bonds by requiring a minimum credit rating of A.

Our investments in corporate bonds and money market funds have an original maturity date of 90 days or less at the time of purchase and are classified as cash equivalents.

We have the ability and intention to hold these investments until maturity and therefore have classified these investments as held-to-maturity and recorded them at amortized cost.

We extend credit for tuition and fees, for a limited period of time, to a majority of our students.

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Transfers of funds from the financial aid programs to us are made in accordance with the ED requirements.

Approximately 67% of our revenues, on a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2019 .

This percentage differs from our Title IV percentage as calculated under the 90/10 rule due to the prescribed treatment of certain Title IV stipends under the rule.

Approximately 66 % of our revenues, on a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2020 as calculated under the 90/10 rule.

Additionally, approximately 17 % of our revenues, on a cash basis, were collected from funds distributed under various veterans benefits programs for the year ended September 30, 2020.

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Students typically apply the funds received from the federal financial aid programs to pay their tuition and fees.

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($’s in thousands, except per share amounts)

of funds is from the financial aid program to the student, who then uses those funds to pay for a portion of the cost of their education.

The transfer of funds is from the financial aid program to the student, who then uses those funds to pay for a portion of the cost of their education.

The receipt of financial aid funds reduces the student’s amounts due to us and has no impact on revenue recognition, as the transfer relates to the source of funding for the costs of education, which may occur either through Title IV or other funds and resources available to the student.

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Start-up Costs

Costs related to the start-up of new campuses are expensed as incurred.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-01, Business Combinations (Topic 805):

Clarifying the Definition of a Business.

ASU 2017-01 clarifies the definition of a business.

If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the acquisition is not a business.

In addition, a business must include at least one substantive process.

The standard is to be applied on a prospective basis to purchases or disposals of a business or an asset.

We adopted ASU 2017-01 as of October 1, 2018.

There was no impact to our financial statements or disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows.

We adopted ASU 2016-15 as of October 1, 2018.

There was no impact on our consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash.

This guidance requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows.

We adopted ASU 2016-18 as of October 1, 2018 using the retrospective method of adjustment.

Because of our adoption of ASU 2016-18, net cash provided by (used in) operating activities increased $0.1 million and $11.1 million for the years ended September 30, 2018 and 2017 , respectively.

Net cash provided by (used in) investing activities decreased by $0.9 million and $2.3 million for the years ended September 30, 2018 and 2017 .

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:

Costs related to the start-up of new campuses and programs are expensed as incurred.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

September 30, 2019

September 30, 2018

September 30, 2017

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents and restricted cash shown in condensed consolidated statements of cash flows

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities.

ASU 2016-01 primarily impacts the accounting for equity investments other than those accounted for using the equity method of accounting, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments.

Additionally, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

The accounting for other financial instruments, such as loans, investments in debt securities and financial liabilities is largely unchanged.

We adopted ASU 2016-01 as of October 1, 2018.

There was no impact to our financial statements or disclosures.

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

ASU 2018-02 amends Accounting Standards Codification (ASC) 220 to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the "Tax Cuts and Jobs Act" and requires entities to provide certain disclosures regarding stranded tax effects.

We adopted ASU 2018-02 as of October 1, 2018.

There was no impact to our financial statements or disclosures.

Effective the first quarter of fiscal 2020:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.

(In thousands, except per share amounts)

Note 3 - Recent Accounting Pronouncements

Accounting Pronouncements Effective in Fiscal 2020

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amended the FASB Accounting Standards Codification (“ASC”) by creating ASC 842 to replace ASC 840.

ASU 2016-02 requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) to provide entities with relief from the costs of implementing certain aspects of the new leasing standard.

ASU 2018-11 allows entities to elect not to recast the comparative periods presented when transitioning to Accounting Standards Codification Topic 606, Revenue from Contracts from Customers (ASC 606).

It also allows lessors to elect not to separate lease and nonlease components when certain conditions are met.

It also allows lessors to elect not to separate lease and non-lease components when certain conditions are met.

In March 2019, the FASB issued ASU 2019-01, Lease (Topic 842):

Codification Improvements.

Codification Improvements (“ASU 2019-01”).

ASU 2019-01 clarifies certain items regarding lessor accounting.

It also clarifies the interim disclosure requirements during transition.

We are in the process of implementing a new enterprise-wide lease accounting system and are modifying internal controls to address the collection, recording, and accounting for leases in accordance with ASC 842.

ASC 842 also provides a package of transition practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing lease.

We adopted ASC 842, effective October 1, 2019 and we elected the package of transition practical expedients.

The new guidance in ASC 842 also provides a package of transition practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing lease.

We adopted ASC 842 effective October 1, 2019, and elected the package of transition practical expedients.

We also elected additional transitional practical expedients that allow an entity to not reassess land easements not previously addressed under ASC 840 and to not recognize on the balance sheet leases with terms of less than 12 months.

We expect to use the modified retrospective method without the recasting of comparative periods’ financial information.

The quantitative amounts provided below are estimates of the expected effects of our adoption of ASC 842.

The amounts below represent management’s best estimates of the effects of adopting ASC 842 at the time of the preparation of this Annual Report on Form 10-K.

The adoption of the standard will result in the recognition of operating lease right-of-use assets ranging from approximately $144.0 million to $154.0 million and operating

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($’s in thousands, except per share amounts)

lease liabilities ranging from approximately $156.0 million to $166.0 million based on the lease portfolio as of October 1, 2019.

We are using the modified retrospective method without the recasting of comparative periods’ financial information.

We did not elect the practical expedient to use hindsight in determining a lease term of the ROU assets at the adoption date.

As a result of adopting the new standard, we recognized an operating lease liability of $ 163.0 million and an operating lease ROU asset of $ 148.6 million on October 1, 2019.

The change resulted in the de-recognition of approximately $ 0.9 million of other assets and $ 15.3 million of other liabilities.

The standard did not materially impact our condensed consolidated statements of operations and cash flows.

In addition, we have two build-to-suit leases that were accounted for as financing obligations and related assets because we had continued involvement in the related facility after the construction period was completed.

The financing obligations will be classified as operating leases in accordance with the new standard as of the transition date including recognition of operating lease right-of-use assets and lease liabilities.

The change will result in the derecognition of approximately $40.7 million of existing deferred financing obligation and $31.6 million in related assets.

The cumulative impact of the derecognition of these financing obligations as of October 1, 2019, will be an increase in stockholders' equity of approximately $9.1 million .

The reclassification will also result in the recognition of rent expense, which was previously reported as interest expense under the former guidance.

The adoption of this standard is not expected to have a material impact on the Company’s liquidity or cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).

The financing obligations are now classified as operating leases in accordance with the new standard as of the transition date, including recognition of operating lease ROU assets and lease liabilities.

The change resulted in the de-recognition of approximately $ 40.7 million existing deferred financing obligations and $ 31.6 million in related assets.

The net impact of the de-recognition and the adoption of ASC 842 as of October 1, 2019 was an increase in stockholders’ equity of approximately $ 9.1 million, with a subsequent adjustment during the three months ended March 31, 2020, which reduced the impact to stockholders’ equity by $ 0.1 million.

The transition also resulted in the recognition of rent expense, which was previously reported as interest expense under the former guidance.

See Note 10 “Leases” for our fiscal 2020 disclosures.

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”).

ASU 2018-13 amends the disclosure requirements of ASC 820, changing the fair value measurement disclosure requirements of ASC 820 by adding new disclosure requirements, modifying existing disclosure requirements and eliminating other disclosure requirements.

Early adoption is permitted.

We do not expect that the standard will have a material impact to our financial statement disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and other Internal-use Software (Subtopic 350-40).

We adopted ASU 2018-13 as of October 1, 2019.

There was no impact to our consolidated financial statements or disclosures.

Cloud Computing Arrangements

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and other Internal-use Software (Subtopic 350-40) (“ASU 2018-15”).

ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement (“CCA”) that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software.

Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract.

Early adoption is permitted.

The effect of this new standard on our consolidated financial statements will be dependent on our entry into any future cloud computing arrangements.

Effective the first quarter of fiscal 2021:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 includes an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses (ECL), which the FASB believes will result in more timely recognition of such losses.

In April 2019, the FASB issued ASU 2019-05 - Targeted Transition Relief, which provides transition relief to entities adopting ASU 2016-13.

Specifically, ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs

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(In thousands, except per share amounts)

should be capitalized in a CCA that is considered a service contract.

The effect of this new standard on our consolidated financial statements is dependent on our entry into any future cloud computing arrangements.

Accounting Pronouncements Effective in Fiscal 2021

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses:

Measurement of Credit Losses on Financial Instruments (Topic 326) .

This update significantly changes the way that entities will be required to measure credit losses.

This standard requires that entities estimate credit losses based upon an “expected credit loss” approach rather than the “incurred loss” approach, which is currently used.

The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable forecasts of collectability.

The change in approach is anticipated to impact the timing of recognition of credit losses.

This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019.

These changes became effective for the Company's fiscal year beginning October 1, 2020.

Upon adoption on October 1, 2020, we recorded an increase in our receivables balance related to our proprietary loan program of $ 1.6 million, with the corresponding amount recorded as an increase to retained earnings.

No other adjustments were deemed necessary in applying this new guidance, and we do not expect the adoption of ASU 2016-13 to have a material impact on our results of operations.

Accounting Pronouncements Effective in Fiscal 2022

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

We are currently evaluating the impact that the update will have on our results of operations, financial condition and financial statement disclosures.

Revenue from Contracts with Customers

Note 4 - Revenue from Contracts with Customers

Nature of Goods and Services

See Note 2 for a description of the nature of revenues.

We provide postsecondary education and other services in the same geographical market, the U.S.

The impact of economic factors on the nature, amount, timing and uncertainty of revenue and cash flows is consistent among our various postsecondary education programs.

See Note 17 for disaggregated segment revenue information.

See Note 2 “Summary of Significant Accounting Policies” for a description of the nature of revenues.

Postsecondary Education

Revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who withdraw from our programs prior to specified dates.

We apply the five-step model outlined in ASC 606, Revenue from Contracts from Customers .

Tuition and fee revenue is recognized ratably over the term of the course or program offered.

The majority of our programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration.

We supplement our revenues with sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs.

Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in our condensed consolidated balance sheets because it is expected to be earned within the next 12 months.

Additionally, certain students participate in a proprietary loan program that extends repayment terms for their tuition.

We purchase said loans from the lender and, based on historical collection rates, believe a portion of these loans are collectible.

Accordingly, we recognize tuition and loan origination fees financed by the loan and any related interest revenue under the effective interest method required under the loan based on the amount we expect to collect, and we recognize these revenues ratably over the term of the course or program offered.

We provide dealer technician training or instructor staffing services to manufacturers.

Revenues are recognized as transfer of the services occurs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

(In thousands, except per share amounts)

We provide postsecondary education and other services in the same geographical market, the United States.

The impact of economic factors on the nature, amount, timing and uncertainty of revenue and cash flows is consistent among our various postsecondary education programs.

See Note 19 “Segment Information” for disaggregated segment revenue information.

Contract Balances

Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date.

Contract assets primarily relate to our rights to consideration for a student’s progress through our training program in relation to our services performed but not billed at the reporting date.

The contract assets are transferred to the receivables when the rights become unconditional.

Currently, the Company does not have any contract assets which have not transferred to a receivable.

The contract liabilities primarily relate to service contracts where we received payments but we have not yet satisfied the related performance obligations.

The advance consideration received from customers for the services is a contract liability until services are provided to the customer.

Currently, we do not have any contract assets that have not transferred to a receivable.

Our deferred revenue is considered a contract liability and primarily relates to our enrollment agreements where we received payments for tuition but we have not yet delivered the related training programs to satisfy the related performance obligations.

The advance consideration received from students or Title IV funding is deferred revenue until the training program has been delivered to the students.

The following table provides information about receivables and contract liabilities from contracts with customers:

September 30, 2019

September 30, 2018

September 30, 2020 September 30, 2019

Receivables, which includes Tuition and Notes Receivable $ 53,144 $ 44,629

Contract liabilities

Deferred revenue $ 40,694 $ 42,886

During the year ended September 30, 2020, the contract liabilities balance included decreases for revenues recognized during the period and increases related to new students who started school during the period.

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The majority of our programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration.

Postemployment Benefits

On February 18, 2019, we announced that our campus in Norwood, Massachusetts is no longer accepting new student applications, and its last group of students started on March 18, 2019.

The campus is expected to close before the end of fiscal year 2020.

We expect the postemployment benefits will total approximately $1.0 million , when the campus closes in 2020.

Additionally, we periodically enter into agreements that provide postemployment benefits to personnel whose employment is terminated.

The postemployment benefit liability, which is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets, is generally paid out ratably over the terms of the agreements, which range from 1 month to 24 months , with the final agreement expiring in 2021.

The postemployment benefit accrual activity for the year ended September 30, 2019 was as follows:

Liability Balance at

September 30, 2018

Postemployment

Benefit Charges

Liability Balance at September 30, 2019

(1) Primarily relates to the reclassification of benefits between severance and other benefits.

Impacts of COVID-19

On March 19, 2020, we suspended all in person classes at all of our campuses for the safety and protection of our students and staff, to help slow the spread of COVID-19 and to comply with state and local orders and restrictions.

Upon the suspension of all in person classes, we provided all students with the opportunity to take a leave of absence or to continue their education via an online curriculum.

We do not recognize revenue while a student is on a leave of absence.

On March 25, 2020, we began offering the classroom portion of our training online so that the more than 8,000 students who elected to remain active in the program could continue their education remotely.

As our training is a combination of classroom lectures and hands-on labs, there is a portion of most classes that cannot be delivered online and needs to be completed in-person at the campus lab.

During the year ended September 30, 2020, as campuses were able to reopen, we transitioned our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs.

In May 2020, we resumed in-person labs at eight of our campus locations.

Four of our campuses resumed in-person labs in June 2020, and our final campus resumed in-person labs in Bloomfield, New Jersey on July 1, 2020.

On-campus labs have been re-designed to meet the health, safety and social distancing guidelines imposed by the Centers for Disease Control (“CDC”) and state and local jurisdictions, while still meeting our accreditation and curriculum requirements.

Upon the initial resumption of in-person labs, once a student returned to campus for in-person labs, under the new guidelines it takes on average approximately six to nine weeks for that student to catch up on the lab work that he was unable to complete during the campus closure and prior to his return.

As of September 30, 2020, approximately 5 % of students had not returned to campus to complete the in-person labs and remain only in the online portion of the curriculum, essentially only completing half of each course, while approximately 28 % of students were completing catch up labs, but over an extended period of time.

We continue to recognize revenue ratably over the term of the course or program offered, taking into consideration those only completing the online curriculum, and the catch-up period for active students and the impact it has on expected graduation dates.

As a result, as of September 30, 2020, we had deferred revenue of $ 6.1 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Receivables, net

(In thousands, except per share amounts)

Note 5 - Post-employment Benefits

On February 18, 2019, we announced that our campus in Norwood, Massachusetts is no longer accepting new student applications, and its last group of students started on March 18, 2019 and completed the curriculum in July 2020, with the campus closing on July 31, 2020.

The post-employment benefits incurred due to the campus closure were approximately $ 1.1 million.

Additionally, we periodically enter into agreements that provide post-employment benefits to personnel whose employment is terminated.

On October 21, 2019, we announced the retirement of our former President and Chief Executive Officer, Kimberly J.

McWaters, effective October 31, 2019.

During the twelve months ended September 30, 2020, we incurred post-employment benefit charges of $ 1.5 million and paid cash of $ 1.2 million, in accordance with Ms.

McWaters’ Retirement Agreement and Release of Claims, dated October 31, 2019.

The post-employment benefit liability, which is included in “Accounts payable and accrued expenses” on the accompanying consolidated balance sheets, is generally paid out ratably over the terms of the agreements, which range from 1 month to 24 months, with the final agreement expiring in 2021.

The post-employment benefit accrual activity for the years ended September 30, 2020 and 2019 was as follows:

Severance Other Total

Balance accrued as of September 30, 2018 $ 372 $ 9 $ 381

Post-employment benefit charges 1,637 90 1,727

Cash paid ( 1,159 ) ( 28 ) ( 1,187 )

Other non-cash adjustments (1)

( 129 ) ( 39 ) ( 168 )

Balance accrued as of September 30, 2019 $ 721 $ 32 $ 753

Post-employment benefit charges 2,223 57 2,280

Cash paid ( 2,210 ) ( 51 ) ( 2,261 )

Other non-cash adjustments (1)

131 ( 29 ) 102

Balance accrued as of September 30, 2020 $ 865 $ 9 $ 874

(1) Primarily relates to the reclassification of benefits between severance and other benefits.

Note 6 - Receivables, net

Receivables, net consist of the following:

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Other receivables 6,494 7,078

Less allowance for uncollectible accounts

The allowance for uncollectible accounts is estimated using our historical write-off experience applied to the receivable balances for students who are no longer attending school due to graduation or withdrawal or who are in school and have receivable balances in excess of financial aid available to them.

Receivables 37,204 19,034

allowance for uncollectible accounts ( 1,793 ) ( 1,097 )

Receivables, net $ 35,411 $ 17,937

(1) Primarily related to an income tax receivable recorded as a result of the net operation loss provisions in the CARES Act.

See Note 13 “Income Taxes” for further discussion.

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(In thousands, except per share amounts)

receivable balances in excess of financial aid available to them.

We write off receivable balances against the allowance for uncollectible accounts at the time we transfer the balance to a third party collection agency.

The following table summarizes the activity for our allowance for uncollectible accounts for the year ended September 30:

Write-offs of

Uncollectible

Fair Value Measurements

The following table summarizes the activity for our allowance for uncollectible accounts for the years ended September 30, 2020, 2019 and 2018:

Year Ended September 30,

2020 2019 2018

Balance at beginning of period $ 1,097 $ 999 $ 579

Additions to bad debt expense 1,767 1,166 1,511

Write-offs of uncollectible accounts ( 1,071 ) ( 1,068 ) ( 1,091 )

Balance at end of period $ 1,793 $ 1,097 $ 999

Note 7 - Investments

In February 2020, we raised approximately $ 49.5 million in net proceeds from an underwritten public offering of shares of our common stock.

See Note 15 “Shareholders’ Equity” for further details on the equity offering.

We invested a portion of the proceeds from the equity offering in held-to-maturity securities, which primarily consist of corporate bonds from large cap industrial and selected financial companies with a minimum credit rating of A.

We have the ability and intention to hold these investments until maturity and therefore have classified these investments as held-to-maturity and recorded them at amortized cost.

The amortized cost, gross unrealized gains or losses, and fair value of investments classified as held-to-maturity at September 30, 2020 were as follows:

Gross Unrealized Estimated Fair

Due in less than 1 year:

Amortized Cost Gains Losses Market Value

Corporate and municipal bonds $ 38,055 $ 10 $ ( 33 ) $ 38,032

Total as of September 30, 2020 $ 38,055 $ 10 $ ( 33 ) $ 38,032

Investments are exposed to various risks, including interest rate, market and credit risk.

As a result, it is possible that changes in the values of these investments may occur and that such changes could affect the amounts reported in the condensed consolidated financial statements.

Note 8 - Fair Value Measurements

The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements.

The fair value hierarchy consists of three tiers:

Level 1, defined as quoted market prices in active markets for identical assets or liabilities;

Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and Level 3, defined as unobservable inputs that are not corroborated by market data.

Defined as quoted market prices in active markets for identical assets or liabilities.

Defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Defined as unobservable inputs that are not corroborated by market data.

Any transfers of investments between levels occurs at the end of the reporting period.

Assets measured or disclosed at fair value on a recurring basis consisted of the following:

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Assets measured or disclosed at fair value on a recurring basis consisted of the following:

(In thousands, except per share amounts)

Fair Value Measurements Using

September 30, 2019

Quoted Prices

September 30, 2020 Quoted Prices

Identical Assets

Money market funds and bonds

(Level 1) Significant

(Level 2) Significant

Money market funds (1)

$ 43,322 $ 43,322 $ — $ —

Notes receivable (2)

32,793 — — 32,793

Corporate bonds (3)

33,119 33,119 — —

Municipal bonds, and other (3)

4,913 4,913 — —

Total assets at fair value on a recurring basis $ 114,147 $ 81,354 $ — $ 32,793

Fair Value Measurements Using

September 30, 2018

Quoted Prices

September 30, 2019 Quoted Prices

Identical Assets

(Level 1) Significant

(Level 2) Significant

Money market funds (1)

$ 37,794 $ 37,794 $ — $ —

Notes receivable (2)

35,079 — — 35,079

Total assets at fair value on a recurring basis $ 72,873 $ 37,794 $ — $ 35,079

Money market funds and bonds are reflected as cash and cash equivalents in our consolidated balance sheets.

Notes receivable relate to our propriety loan program.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Property and Equipment, net

(1) Money market funds and other highly liquid investments with maturity dates less than 90 days are reflected as “Cash and cash equivalents” in our consolidated balance sheet as of September 30, 2020 and 2019.

(2) Notes receivable relate to our proprietary loan program.

(3) Corporate bonds, municipal bonds, and other are reflected as “Held-to-maturity investments” in our consolidated balance sheet as of September 30, 2020.

Note 9 - Property and Equipment, net

Property and equipment, net consisted of the following:

Lives (in years)

September 30,

Lives (in years) September 30,

2020 September 30,

Land — $ 3,189 $ 3,189

Building and building improvements 3 - 35

28,046 82,653

Leasehold improvements 1 - 28

62,899 53,020

Training equipment 3 - 10

91,731 96,737

Office and computer equipment 3 - 10

33,524 35,927

Curriculum development 5 19,692 19,692

Software developed for internal use 1 - 5

11,951 11,354

Vehicles 5 1,502 1,454

Right-of-use assets for finance leases 2 - 3

Construction in progress — 2,213 1,631

Less accumulated depreciation and amortization

Depreciation expense related to our property and equipment was $16.4 million , $16.0 million and $16.9 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

Amortization expense related to curriculum development and software developed for internal use was $0.5 million , $0.5 million and $0.7 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

The following amounts, which are included in the above table, represent assets financed by financing obligations:

September 30,

255,106 305,657

accumulated depreciation and amortization ( 182,363 ) ( 201,531 )

Property and equipment, net $ 72,743 $ 104,126

As previously discussed in Note 3 “Summary of Significant Accounting Policies,” the adoption of ASC 842 as of October 1, 2019 resulted in the de-recognition of the assets associated with our financing obligations, which were previously included in

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

“Buildings and building improvements.” In addition, certain items related to the build-to-suit leases in “Buildings and building improvements” were reclassified to “Leasehold improvements” as part of the adoption of ASC 842.

The following amounts, which are included in the above table, represented assets financed by financing obligations as of September 30, 2019:

September 30,

Assets financed by financing obligations, gross $ 45,816

Less accumulated depreciation and amortization

accumulated depreciation and amortization ( 14,208 )

Assets financed by financing obligations, net $ 31,608

Build-to-Suit Leases

We entered into build-to-suit facility lease agreements related to the design and construction of our Long Beach, California campus and the relocation of our Glendale Heights, Illinois campus to, and the design and construction of a new campus in, Lisle, Illinois.

Under each agreement, we determined that we have continued involvement in the related facility after the construction period was completed.

Therefore, the arrangements are accounted for as financing obligations.

Accordingly, the asset and a corresponding financing obligation are included in our consolidated balance sheet.

The asset is being depreciated over the initial lease term of 15 years for our Long Beach, California campus, and over the initial lease term of 18 years for our Lisle, Illinois campus.

The financing obligation is amortized through the effective interest method in which a portion of the lease payments is recognized as interest expense, a portion is allocated to the imputed land lease and the remaining portion decreases the financing obligation.

Additionally, for each campus, we have an imputed operating lease related to our use of the land which is recognized from the time we entered into the agreement through the initial lease term.

Construction for our Long

Note 10 - Leases

We lease 10 of our 12 campuses and our corporate headquarters under non-cancelable operating leases, some of which contain escalation clauses and requirements to pay other fees associated with the leases.

Our lease for the Norwood, Massachusetts campus ended on July 31, 2020 when the campus closed.

During the year ended September 30, 2020, we relocated our corporate headquarters facility in conjunction with the expiration of the existing lease agreement, and entered into a new long-term lease agreement at a new facility.

We also modified our existing lease for our Sacramento campus by extending the term, and reducing the leased square footage effective as of January 1, 2022.

Our facility leases have original lease terms ranging from 8 to 20 years and expire at various dates through 2033.

In addition, the leases commonly include lease incentives in the form of rent abatements and tenant improvement allowances.

We sublease certain portions of unused building space to third parties, which currently result in minimal income.

All of the leases, other than those that may qualify for the short-term scope exception of 12 months or less, are recorded on our consolidated balance sheets.

Some of the facility leases are subject to annual changes in the Consumer Price Index (“CPI”).

While lease liabilities are not remeasured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.

Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised.

There are no early termination with penalties, residual value guarantees, restrictions or covenants imposed by our facility leases.

Significant Assumptions and Judgments

To determine if a contract is or contains a lease, we considered whether (1) explicitly or implicitly identified assets have been deployed in the contract and (2) we obtain substantially all of the economic benefits from the use of that underlying asset and direct how and for what purpose the asset is used during the term of the contract.

If we determine a contract is, or contains, a lease, we assess whether the contract contains multiple lease components.

We consider a lease component to be separate from other lease components in the contract if (a) we can benefit from the right of use either on its own or together with other resources that are readily available to us and (b) the right of use is neither highly dependent on nor highly interrelated with the other right(s) to use underlying assets in the contract.

In contracts involving the use of real estate, we separate the right to use land from other underlying assets unless the effect of separating the land is insignificant to the resulting lease accounting.

We have elected to account for the lease and non-lease components as a single lease component.

For all leases we are a party to, the discount rate implicit in the lease was not readily determinable.

Therefore, we used our incremental borrowing rate for each lease to determine the present value of the lease.

We determined the incremental borrowing rate applicable to each lease through a model that represents the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The incremental borrowing rate was applied to each lease based on the remaining term of the lease.

The components of lease expense are included in “Educational services and facilities” and “Selling, general and administrative” on the consolidated statement of operations, with the exception of interest on lease liabilities, which is included in “Interest expense.”

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Beach, California campus was completed during August 2015 and the facility was placed into service effective September 1, 2015.

Construction for our Lisle, Illinois campus was completed during November 2013 and the facility was placed into service effective December 1, 2013.

Future minimum lease payments under the Lisle, Illinois and Long Beach, California leases as of September 30, 2019 are as follows:

Years ending September 30,

Total future minimum lease obligation

Less imputed interest on financing obligation

Less imputed accrued land lease obligation

Net present value of financing obligation

Investment in Unconsolidated Affiliate

(In thousands, except per share amounts)

The components of lease expense during the year ended September 30, 2020 were as follows:

Lease Expense Year ended September 30, 2020

Operating lease expense (1)

Finance lease expense:

Amortization of leased assets 102

Interest on lease liabilities 7

Variable lease expense 4,120

Sublease income ( 744 )

Total net lease expense $ 32,833

(1) Excludes the expense for short-term leases not accounted for under ASC 842, which was not significant for the year ended September 30, 2020.

Supplemental balance sheet, cash flow and other information related to our leases was as follows:

Leases Classification As of September 30, 2020

Operating lease assets Right-of-use assets for operating leases $ 144,663

Finance lease assets Property and equipment, net (1)

Total leased assets $ 144,920

Operating lease liabilities Operating lease liability, current portion $ 23,666

Finance lease liabilities Other current liabilities 129

Operating lease liabilities Operating lease liability 134,089

Finance lease liabilities Other liabilities 131

Total lease liabilities $ 158,015

(1) Finance lease assets are recorded net of accumulated amortization of $ 0.1 million as of September 30, 2020.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Supplemental Disclosure of Cash Flow Information and Other Information Year ended September 30, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 25,617

Operating cash flows from finance leases 7

Financing cash flows from finance leases 99

Non-cash activity related to lease liabilities:

Lease assets obtained in exchange for new operating lease liabilities $ 20,321

Leases assets obtained in exchange for new finance lease liabilities 215

Lease Term and Discount Rate As of September 30, 2020

Weighted-average remaining lease term (in years):

Operating leases 9.34

Finance leases 2.05

Weighted average discount rate:

Operating leases 4.37 %

Finance leases 3.08 %

Maturities of lease liabilities were as follows:

As of September 30, 2020

Years ending September 30, Operating Leases Finance Leases

2021 $ 28,212 $ 135

2022 27,447 110

2023 18,565 23

2024 17,435 —

2025 15,022 —

2026 and thereafter 86,134 —

Total lease payments 192,815 268

interest ( 35,060 ) ( 8 )

Present value of lease liabilities 157,755 260

current lease liabilities ( 23,666 ) ( 129 )

Long-term lease liabilities $ 134,089 $ 131

The maturities of lease liabilities as of September 30, 2020 includes the future minimum lease payments for the build-to-suit leases.

Disclosures Related to Periods Prior to the Adoption of ASC 842

As of September 30, 2019, minimum lease payments under non-cancelable operating leases by period were expected to be as follows (in thousands):

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Years ending September 30, Gross Sublease income Net

2020 $ 26,379 $ ( 362 ) $ 26,017

2021 23,531 ( 77 ) 23,454

2022 21,621 ( 78 ) 21,543

2023 10,461 ( 20 ) 10,441

2024 9,180 — 9,180

Thereafter 41,822 — 41,822

Total lease payments $ 132,994 $ ( 537 ) $ 132,457

Related Party Transactions for Leases

Rent expense includes rent paid to related parties, which was approximately $ 2.0 million for the years ended September 30, 2020, 2019, and 2018.

Since 1991, two of our properties comprising our Orlando, Florida location have been leased from entities controlled by John C.

White, a director on our Board of Directors.

The leases extend through August 19, 2022 and August 31, 2022 with annual base lease payments for the first year under this lease totaling approximately $ 0.3 million and $ 0.7 million, with annual adjustments based on the higher of (i) an amount equal to 4 % of the total annual rent for the immediately preceding year or (ii) the percentage of increase in the CPI.

These transactions were not considered significant as of September 30, 2020.

Note 11 - Investment in Unconsolidated Affiliate

In 2012, we invested $ 4.0 million to acquire an equity interest of approximately 28 % in a joint venture (JV) related to the lease of our Lisle, Illinois campus facility.

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During the three months ended December 31, 2017, the JV refinanced the facility loan and discontinued its use of an interest rate cap.

Our equity in earnings of unconsolidated affiliates was $0.4 million , $0.4 million and $0.5 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

Our equity in earnings of unconsolidated affiliates was $ 0.4 million for the years ended September 30, 2020, 2019 and 2018.

Investment in our unconsolidated affiliate consists of the following:

September 30, 2020 September 30, 2019

Carrying Value Ownership Percentage Carrying Value Ownership Percentage

Investment in JV $ 4,494 28.0 % $ 4,338 28.0 %

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Investment in our unconsolidated affiliate consists of the following:

September 30, 2019

September 30, 2018

Carrying Value

Ownership Percentage

Carrying Value

Ownership Percentage

Investment in JV

(In thousands, except per share amounts)

Investment in our unconsolidated affiliate included the following activity during the period:

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Balance at end of period $ 4,494 $ 4,338

Accounts Payable and Accrued Expenses

Through September 30, 2019, the activity from equity in earnings of the unconsolidated affiliate was included in “Other (expense) income, net” on the condensed consolidated statements of operations.

In conjunction with the adoption of ASC 842, as previously described in Note 3 “Summary of Significant Accounting Policies,” beginning October 1, 2019, the activity is included in “Educational services and facilities” on the consolidated statements of operations.

Note 12 - Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

September 30,

September 30, 2018

Accounts payable $ 12,471 $ 10,033

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Other accrued expenses 11,367 13,615

The components of income tax expense (benefit) are as follows:

Accounts payable and accrued expenses $ 51,891 $ 45,878

Note 13 - Income Taxes

The components of income tax benefit (expense) for the years ended September 30, 2020, 2019 and 2018 are as follows:

Year Ended September 30,

Current expense (benefit)

2020 2019 2018

Current benefit (expense):

United States federal $ 11,250 $ 2 $ 125

Total current expense (benefit)

State ( 303 ) ( 205 ) 78

Total current benefit (expense) 10,947 ( 203 ) 203

Deferred benefit (expense):

United States federal ( 345 ) — 2,878

State — — ( 66 )

Total deferred benefit (expense) ( 345 ) — 2,812

Total provision (benefit) for income taxes

Total income tax benefit (expense) $ 10,602 $ ( 203 ) $ 3,015

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

The income tax provision differs from the tax that would result from application of the statutory federal tax rate of 21.0% to pre-tax income for the year ended September 30, 2019, 24.5% to pre-tax income for the year ended September 30, 2018 and 35.0% to pre-tax income for the year ended September 30, 2017.

(In thousands, except per share amounts)

The income tax provision differs from the tax that would result from application of the statutory federal tax rate of 21.0 % to pre-tax income for the years ended September 30, 2020 and September 30, 2019, and 24.5 % to pre-tax income for the year ended September 30, 2018.

The reasons for the differences are as follows:

Year Ended September 30,

Income tax expense (benefit) at statutory rate

2020 2019 2018

Income tax benefit at statutory rate $ 545 $ 1,610 $ 8,746

State income taxes, net of federal tax benefit ( 246 ) ( 165 ) 12

Change in federal statutory rate — — ( 12,645 )

Increase (decrease) in valuation allowance

Total income tax expense (benefit)

Decrease (increase) in valuation allowance 6,135 ( 1,514 ) 7,066

Net operating losses carryback to higher federal statutory rate years 4,270 — —

Other, net ( 102 ) ( 134 ) ( 164 )

Total income tax benefit (expense) $ 10,602 $ ( 203 ) $ 3,015

The components of the deferred tax assets (liabilities) recorded in the accompanying consolidated balance sheets were as follows:

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Gross deferred tax assets:

Right-of-use assets for operating leases $ 40,515 $ —

Deferred compensation $ 802 $ 1,449

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Gross deferred tax liabilities:

Operating lease liability ( 37,083 ) —

Amortization of goodwill and intangibles ( 2,056 ) ( 2,056 )

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Prepaid and other expenses deductible for tax ( 1,011 ) ( 863 )

Total deferred tax liabilities, gross

Total gross deferred tax liabilities ( 45,697 ) ( 13,389 )

Net deferred tax liabilities $ ( 674 ) $ ( 329 )

Certain 2018 amounts within the table above have been reclassified to conform with the current period presentation.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

The following table summarizes the activity for the valuation allowance for the year ended September 30:

(In thousands, except per share amounts)

The following table summarizes the activity for the valuation allowance for the years ended September 30 2020, 2019 and 2018:

Year Ended September 30,

2020 2019 2018

Balance at beginning of period $ 25,673 $ 23,112 $ 38,407

Additions (reductions) to income tax ( 5,947 ) 2,561 ( 5,555 )

Write-offs (1)

(1) Of this total, approximately $9.6 million relates to our adoption of ASC 606 as of October 1, 2017.

( 2,277 ) — ( 9,740 )

Balance at end of period $ 17,449 $ 25,673 $ 23,112

(1) Of this total, approximately $ 9.6 million and $ 2.3 million related to our adoption of ASC 606 as of October 1, 2017 and our adoption of ASC 842 as of October 1, 2019, respectively.

We have valuation allowances of $ 17.4 million and $ 25.7 million against the deferred tax assets as of September 30, 2020 and September 30, 2019, respectively, based on our assessment of the ability to utilize the deferred tax assets.

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A significant piece of negative evidence was the cumulative losses incurred in recent years.

The CARES Act, which was enacted on March 27, 2020, made tax law changes to provide financial relief to companies as a result of the business impacts of COVID-19.

Key income tax provisions of the CARES Act include changes in net operating loss (“NOL”) carryback and carryforwards rules, acceleration of alternative minimum tax credit recovery, increase of the net interest expense deduction limit and charitable contribution limit, and immediate write-off of qualified improvement property.

The CARES Act allows us to carryback $ 20.3 million and $ 13.0 million of NOLs arising in the years ended September 30, 2019 and September 30, 2018, respectively, generating a tax refund of approximately $ 11.3 million.

During the three months ended March 31, 2020, we recorded a receivable for the expected refund.

Approximately $ 4.2 million was received during the year ended September 30, 2020, leaving approximately $ 7.1 million in the receivable balance as of September 30, 2020.

As of September 30, 2020, we had approximately $ 18.9 million and $ 48.4 million in net operating losses for federal and state tax purposes, respectively.

The federal net operating losses can be carried forward indefinitely, while the state net operating losses expire in the years 2027 through 2039 if not utilized.

Under Section 382 of the Internal Revenue Code (IRC), we underwent a change in ownership as a result of a preferred stock issuance in June 2016.

Accordingly, certain deductions and losses will be subject to an annual Section 382 limitation.

The limitation will affect the timing of when these deductions and losses can be used and may cause us to make income tax payments even if a pre-tax loss is recorded in future periods.

The limitation may also cause the deductions and losses to expire unused.

Approximately $ 2.3 million of the federal net operating losses expire in the year 2039 if not utilized, while the rest can be carryforward indefinitely.

The state net operating losses expire in the years 2027 through 2040 if not utilized.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations.

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Our tax filings remain subject to examination by applicable tax authorities for certain length of time, generally three to four years, following the tax year to which these filings relate.

In 2017, 2018 and 2019, we filed returns to carry back federal and certain state net operating losses to prior years.

In fiscal 2018, 2019 and 2020, we filed returns to carry back federal and certain state net operating losses to prior years.

The statute of limitations for adjustment of the net operating losses utilized on these tax returns remains open an additional three to four years, depending on jurisdiction, from the date these returns were filed.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Commitments and Contingencies

Operating Leases

We lease certain of our facilities and certain equipment under non-cancelable operating leases, some of which contain renewal options, escalation clauses and requirements to pay other fees associated with the leases.

We recognize rent expense on a straight-line basis.

Property at one of our campus locations is leased from a related party.

Future minimum rental commitments as of September 30, 2019 for all non-cancelable operating leases are as follows:

Years ending September 30,

Sublease income

Rent expense for operating leases was approximately $28.5 million , $29.1 million and $27.8 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

Rent expense includes rent paid to related parties, which was approximately $2.0 million , $2.0 million and $2.0 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

Since 1991, certain of our properties have been leased from entities controlled by John C.

White, an independent Director on our Board of Directors.

A portion of the property comprising our Orlando, Florida location is occupied pursuant to a lease with the John C.

and Cynthia L.

White 1989 Family Trust, with the lease term expiring on August 19, 2022.

The annual base lease payments for the first year under this lease totaled approximately $0.3 million , with annual adjustments based on the higher of (i) an amount equal to 4% of the total annual rent for the immediately preceding year or (ii) the percentage of increase in the Consumer Price Index.

Another portion of the property comprising our Orlando, Florida location is occupied pursuant to a lease with Delegates LLC, an entity controlled by the White Family Trust, with the lease term expiring on August 31, 2022.

The beneficiaries of this trust are Mr.

White’s children, and the trustee of the trust is not related to Mr.

Annual base lease payments for the first year under this lease totaled approximately $0.7 million , with annual adjustments based on the higher of (i) an amount equal to 4% of the total annual rent for the immediately preceding year or (ii) the percentage of increase in the Consumer Price Index.

(In thousands, except per share amounts)

Note 14 - Commitments and Contingencies

Licensing Agreements

In 1999, we entered into a licensing agreement that gives us the right to use certain materials and trademarks in the development of our courses.

In fiscal 1999, we entered into a licensing agreement that gives us the right to use certain materials and trademarks in the development of our courses.

The agreement was amended in November 2009.

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The agreement terminates upon the written notice of either party providing not less than ninety days notification of intent to terminate.

License fees related to this agreement were $0.6 million ,

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

$0.7 million and $0.9 million for the years ended September 30, 2019 , 2018 and 2017 , respectively, and were recorded in educational services and facilities expenses.

License fees related to this agreement were $ 0.5 million, $ 0.6 million and $ 0.7 million for the years ended September 30, 2020, 2019 and 2018, respectively, and were recorded in educational services and facilities expenses.

In May 2007, we entered into a licensing agreement that gives us the right to use certain trademarks, trade names, trade dress and other intellectual property in connection with the operation of our campuses and courses.

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The agreement required a minimum royalty payment of $ 1.0 million in calendar year 2020.

The minimum royalty payments increase approximately $0.05 million every other calendar year thereafter.

The expense related to these agreements was $ 1.2 million, $ 1.4 million and $ 1.6 million for the years ended September 30, 2020, 2019 and 2018, respectively, and was recorded in educational services and facilities expenses.

Annual payments range between $ 1.0 million and $ 1.5 million throughout the licensing period.

In July 2013, we entered into a training and materials agreement that gives us the right to use certain materials and trademarks in development of our courses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Executive Employment Agreements

We have employment agreements with key executives that provide for continued salary payments and benefits if the executives are terminated for reasons other than cause or in the event of a change in control, as defined in the agreements.

The range of the aggregate commitment upon termination of employment under these agreements and existing equity award agreements as of September 30, 2019 is approximately $2.0 million to $2.6 million .

Change in Control Agreements

We have severance agreements with other executives that provide for continued salary payments if the employees are terminated for any reason within twelve months subsequent to a change in control.

Under the terms of the agreements, these employees are entitled to between six and twelve months salary at their highest rate during the previous twelve months.

In addition, the employees are eligible to receive the unearned portion of their target bonus in effect in the year termination occurs and would be eligible to receive medical benefits under the plans maintained by us at no cost.

The aggregate amount of our commitments under these agreements as of September 30, 2019 is approximately $8.3 million .

(In thousands, except per share amounts)

Deferred Compensation Plans

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As of September 30, 2020, the total face amount of these surety bonds was approximately $ 16.8 million.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

In the ordinary conduct of our business, we are periodically subject to lawsuits, demands in arbitration, investigations, regulatory proceedings or other claims, including, but not limited to, claims involving current or former students, routine employment matters, business disputes and regulatory demands.

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The ultimate outcome of pending legal proceedings to which we are a party may have a material adverse effect on our business, cash flows, results of operations or financial condition.

Shareholders’ Equity

Note 15 - Shareholders’ Equity

Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one vote per share on all matters requiring shareholder approval.

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As of September 30, 2020 and 2019, 700,000 shares of Series A Preferred Stock were issued and outstanding.

The liquidation preference associated with the Series A Preferred Stock was $100 per share at September 30, 2019 and 2018.

Series A Convertible Preferred Stock

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

On June 24, 2016, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with Coliseum Holdings I, LLC (“Purchaser”) to sell to the Purchaser 700,000 shares of Series A Preferred Stock for a total purchase price of $ 70.0 million.

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the transformation plan, expansion to new markets with metro campuses and the creation of new programs in existing markets with under-utilized campus facilities.

Additionally, we may also use the proceeds to fund strategic acquisitions that complement our core business.

The Series A Preferred Stock is perpetual, and therefore does not have a maturity date.

In conjunction with this purchase, we incurred $ 1.2 million in stock issuance costs, which were recorded as a reduction of the additional paid-in capital associated with the Series A Preferred Stock.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

The description below provides a summary of certain material terms of the Series A Preferred Stock pursuant to the Purchase Agreement and set forth in the Certificate of Designations (Certificate) of the Series A Preferred Stock:

The description below provides a summary of certain material terms of the Series A Preferred Stock as set forth in the Certificate of Designations (“Certificate of Designations”) of the Series A Preferred Stock:

The Series A Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank senior to our common stock and each other junior class or series of shares that we may issue in the future.

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We may pay a cash dividend on each share of the Series A Preferred Stock at a rate of 7.5 % per year on the liquidation preference then in effect (“Cash Dividend”).

Such dividend shall be paid before any dividends would be declared or paid to common stockholders or other junior stockholders.

The Cash Dividend is payable before any dividends would be declared or paid to common stockholders or other junior stockholders.

If we do not pay a Cash Dividend, the liquidation preference shall be increased to an amount equal to the current liquidation preference in effect plus an amount reflecting that liquidation preference multiplied by the Cash Dividend rate then in effect plus 2.0 % per year (“Accrued Dividend”).

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Alternatively, the holder may choose to receive the amount that would be payable per share of common stock issued upon conversion of the Series A Preferred Stock immediately prior to such liquidation event.

The agreement provides that, in the case of a Deemed Liquidation Event, each holder of Series A Preferred Stock shall be entitled to receive the liquidation amount they would receive under a normal liquidation event;

Mergers (regardless of whether we remain the surviving entity), sale of substantially all of our assets or any other recapitalization, reclassification or other transaction in which substantially all of our common stock is exchanged or converted into cash or other property are considered “Deemed Liquidation Events.” The Certificate of Designations provides that, in the case of a Deemed Liquidation Event, each holder of Series A Preferred Stock shall be entitled to receive the liquidation amount they would receive under a normal liquidation event;

however, the liquidation amount must be in the same form of consideration as is payable to the holders of our common stock.

The liquidation preference associated with the Series A Preferred Stock was $ 100 per share at September 30, 2020 and 2019.

UNIVERSAL TECHNICAL INSTITUTE, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock on an as-converted basis.

The holders of the Series A Preferred Stock may vote only to an extent not to exceed 4.99% of the aggregate voting power of all of our voting stock outstanding at the close of business on the issue date (Investor Voting Cap), until such time that we seek regulatory approval to remove this cap.

Additionally, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions, including, among others, the issuance of certain equity securities;

(In thousands, except per share amounts)

Holders of Series A Preferred Stock are entitled to vote with the holders of shares of common stock on an as converted basis, subject to the Continuing Caps as discussed below.

A majority of the voting power of the Series A Preferred Stock must approve certain significant actions, including, without limitation, the issuance of certain equity securities;

the repurchase, redemption or acquisition of our common stock;

the incurrence of debt;

the payment of dividends or distributions to any junior stock prior to December 31, 2017;

the consummation of certain acquisitions, mergers or other such transactions;

and the sale of material assets.

Coliseum Capital Management, LLC, an affiliate of the Purchaser, and its affiliates also beneficially own 3,643,199 shares of our common stock, as reported in a form 13D/A filed with the SEC on June 28, 2016;

this represents approximately 14.6% of our outstanding common stock.

There is no voting limitation on this common stock.

Conversion Rate and Conversion Price

The conversion rate for the Series A Preferred Stock will be calculated by dividing the current liquidation preference by the conversion price then in effect.

The initial conversion price for the Series A Preferred Stock is $3.33 per share.

The conversion price is subject to adjustment upon the occurrence of certain common stock events, as defined in the Purchase Agreement, including stock splits, reverse stock splits or the issuance of common stock dividends.

Optional Conversion by Purchaser

Shares of Series A Preferred Stock are convertible to common stock at any time at the option of the holder.

The Series A Preferred Stock may be converted only to the extent that the number of shares of common stock issued upon conversion does not exceed 4.99% of the total share of common stock outstanding on the issue date (Conversion Cap).

The Conversion Cap was calculated to be 1,225,226 shares on the issue date of June 24, 2016, and may be removed upon regulatory approval.

Optional Conversion by Our Company

If at any time following the third anniversary of the issuance of the Series A Preferred Stock, the volume weighted average price of our common stock equals or exceeds 2.5 times the conversion price of the Series A Preferred Stock for a period of 20 consecutive trading days (Conversion Trigger), we may, at our option and subject to obtaining any required stockholder and regulatory approvals, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into our common stock at the conversion rate.

We may not elect such conversion during the closed trading window periods in which any director or executive officer of our company is prohibited by us to, directly or indirectly, purchase, sell or otherwise acquire or transfer any equity security of our company.

If we are unable to obtain the necessary regulatory approvals to remove the Conversion Cap within 120 days of giving our notice of intent to convert, we will have the option to redeem all shares of the Series A Preferred Stock at a premium.

The Certificate of Designations includes a Conversion Cap and an Investor Voting Cap (each as defined in the Certificate of Designations), which generally prohibit:

(i) the conversion of Series A Preferred Stock into common stock;

and (ii) the voting of common stock issuable upon conversion of the Series A Preferred Stock, to the extent that such conversion results in the issuance of a number of shares of common stock exceeding 4.99 % of our outstanding shares of common stock as of June 24, 2016 or that has voting power that exceeds 4.99 % of the voting power of our outstanding shares of common stock as of June 24, 2016.

The Certificate of Designations provides that the Conversion Cap and the Investor Voting Cap may only be removed upon our receipt of:

(i) certain stockholder approvals required by Section 312.03 of the New York Stock Exchange Listed Company Manual (“NYSE Rule 312”);

and (ii) either (A) Education Regulatory Approval (as defined in the Certificate of Designations), or (B) a good faith determination by our board of directors that Education Regulatory Approval is not required.

Our stockholders approved a proposal at the annual meeting of stockholders on February 27, 2020 , in accordance with the listing standards of the NYSE, that satisfied NYSE Rule 312.

In August 2020, the Purchaser notified us that it intended to distribute all 700,000 Series A Preferred Stock to its members, and that certain of its members would subsequently distribute their Series A Preferred Stock to (i) limited partners affiliated with the Purchaser and certain other entities for whom Coliseum Capital Management, LLC (an affiliate of the Purchaser) holds voting and dispositive power with respect to the Series A Preferred Stock (the “Affiliated Holders”), which six Affiliated Holders, following such distribution, will own Series A Preferred Stock that would represent, on an as converted basis, approximately 24.9 % of our outstanding shares of common stock and voting power, and (ii) limited partners unaffiliated with the Purchaser (the “Unaffiliated Holders”), which 12 Unaffiliated Holders, following such distribution, each will own Series A Preferred Stock that would represent, on an as converted basis, 9.9 % or less of our outstanding shares of common stock and voting power (collectively, the “Distributions”).

In connection with the Distributions, our board of directors, based on advice of legal counsel, determined that:

(i) no Education Regulatory Approval would be required for the Unaffiliated Holders to remove the Conversion Cap and the Investor Voting Cap with respect to the Series A Preferred Stock acquired in the Distributions;

and (ii) as to the Series A Preferred Stock held by the Affiliated Holders, no Education Regulatory Approval is required prior to the Affiliated Holders (A) converting a number of Series A Preferred Stock into common stock provided that the number of shares of common stock issued pursuant to such conversion, in the aggregate, is less than or equal to 9.9 % of the number of shares of common stock outstanding on an as converted basis as of the date of the Distributions, and (B) voting a number of Series A Preferred Stock provided that the voting power of such Series A Preferred Stock and any shares of common stock issued upon conversion of such Series A Preferred Stock is less than or equal to 9.9 % of the voting power of the common stock outstanding as of the date of the Distributions (the foregoing limitations, the “Continuing Caps”).

The removal of the Conversion Cap and Voting Cap became effective as of the date of the Distributions, subject to the Continuing Caps remaining in place with respect to the Series A Preferred Stock distributed to the Affiliated Holders.

Education Regulatory Approval continue to be required for, and the Continuing Caps will remain in place with respect to, the Series A Preferred Stock acquired by the Affiliated Holders in the Distributions to the extent such shares, on an as converted basis, represent in excess of 9.9 % of our common stock and voting power as of the date of the Distributions.

The Affiliated Holders may, at any time, request that we seek Education Regulatory Approval or make a good faith determination that such approval is not required.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

(In thousands, except per share amounts)

Optional Conversion by Purchaser

The Series A Preferred Stock are convertible to common stock at any time at the option of the holder.

Following the Distributions, the Conversion Cap currently applies to the Affiliated Holders.

Additionally, the recipients of the Series A Preferred Stock in the Distributions entered into standard lock-up agreements with the Company restricting the transfer or sale of the Series A Preferred Stock, or any common stock convertible therefrom, for a period of 180 days from the September 14, 2020 distribution date.

Optional Conversion by Our Company

If at any time following the third anniversary of the issuance of the Series A Preferred Stock, the volume weighted average price of our common stock equals or exceeds 2.5 times the conversion price of the Series A Preferred Stock, or $ 8.33 as of September 30, 2020, for a period of 20 consecutive trading days (“Conversion Trigger”), we may, at our option and subject to obtaining any required stockholder and regulatory approvals, require that any or all of the then outstanding Series A Preferred Stock be automatically converted into our common stock at the conversion rate.

Conversion Rate and Conversion Price

The conversion rate for the Series A Preferred Stock will be calculated by dividing the current liquidation preference by the conversion price then in effect.

The initial and current conversion price for the Series A Preferred Stock is $ 3.33 per share.

Optional Special Dividend and Conversion on Certain Change of Control

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If either the Investor Voting Cap or Conversion Cap is in effect at the date of the notice of redemption, the holder may request that we obtain the necessary regulatory approval for its removal.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Anti-dilution

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That registration statement became effective on October 30, 2019.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Equity Offering

On February 20, 2020, we entered into an Underwriting Agreement with B.

Riley FBR, Inc., as representative of the several underwriters named therein (the “Underwriters”), to issue and sell an aggregate of 6,782,610 shares (the “Firm Shares”) of our common stock, par value $ 0.0001 per share (the “Common Stock”), in a public offering, at a price to the public of $ 7.75 per share, pursuant to a registration statement on Form S-3 (Registration No.

333-236146) (the “Registration Statement”) and the accompanying prospectus , and related prospectus supplement, filed with the SEC (the “Offering”).

In addition, we granted the Underwriters an option (“Option”) to purchase up to an additional 1,017,390 shares of the Common Stock for a period of 30 days from February 20, 2020.

The Offering of the Firm Shares closed on February 25, 2020.

The net proceeds from the Offering were approximately $ 49.2 million, after deducting underwriting discounts.

Direct costs of $ 0.4 million related to the offering were recorded to equity during the three months ended March 31, 2020.

The Underwriters did not exercise the Option in full for the additional 1,017,390 shares.

The 6,782,610 shares purchased were issued from Treasury Stock on February 25, 2020, leaving 82,287 shares in Treasury stock.

We intend to use the proceeds for working capital, capital expenditures, and other general corporate purposes, which may include the addition of new campuses, the expansion of existing programs and the development of new programs, and the purchase of real property and campus infrastructure.

We may also use a portion of the net proceeds to fund potential strategic acquisitions of complementary businesses, assets, services or technologies.

Share Repurchase Program

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During the year ended September 30, 2020, we did not repurchase shares.

The last stock repurchase under this stock repurchase program was during fiscal 2015.

As of September 30, 2020, we have repurchased 1,677,570 shares at an average price per share of $ 9.09 and a total cost of approximately $ 15.3 million under this program.

Under the terms of the Purchase Agreement, stock purchases under this program require the approval of a majority of the voting power of the Series A Preferred Stock.

Stock Option and Incentive Compensation Plans

Under the terms of the Certificate of Designations, stock purchases under this program require the approval of a majority of the voting power of the Series A Preferred Stock.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Note 16 - Stock-Based Compensation

Incentive Compensation Plans

We have two stock-based compensation plans:

the Management 2002 Stock Option Program (2002 Plan) and the 2003 Incentive Compensation Plan (2003 Plan).

the Management 2002 Stock Option Program (“2002 Plan”) and the 2003 Incentive Compensation Plan, as amended (“2003 Plan”).

The 2002 Plan was approved by our Board of Directors on April 1, 2002 and provided for the issuance of options to purchase 0.7 million shares of our common stock.

On February 25, 2003, our Board of Directors authorized an additional 0.1 million options to purchase our common stock under the 2002 Plan.

Options issued under the 2002 Plan vest ratably each year over a four -year period.

The expiration date of options granted under the 2002 Plan is the earlier of the ten -year anniversary of the grant date;

the one -year anniversary of the termination of the participant’s employment by reason of death or disability;

30 days after the date of the participant’s termination of employment if caused by reasons other than death, disability, cause, material breach or unsatisfactory performance or on the termination date if termination occurs for reasons of cause, material breach or unsatisfactory performance.

We do not intend to grant any additional options under the 2002 Plan.

The 2003 Plan was approved by our Board of Directors and adopted effective December 22, 2003 upon consummation of our initial public offering and amended on February 28, 2007 and February 22, 2012 by our stockholders.

The 2003 Plan, as amended, authorizes the issuance of various common stock awards, including stock options, restricted stock and stock units, for approximately 6.3 million shares of our common stock.

The 2003 Plan, as amended, authorizes the issuance of various common stock awards, including stock options, restricted stock awards and restricted stock units, for approximately 6.3 million shares of our common stock.

As of September 30, 2020, 2.2 million shares of common stock were reserved for issuance under the 2003 Plan, of which 1.3 million shares are available for future grant.

Effective October 1, 2016, we adopted the March 2016 guidance issued by the FASB and account for forfeitures as they occur.

The following table summarizes the operating expense line and the impact on net loss in the consolidated statements of loss in which stock-based compensation expense has been recorded:

When recording our stock-based compensation expense, we account for forfeitures as they occur.

The following table summarizes the operating expense line and the impact on net income (loss) in the consolidated statements of operations in which stock-based compensation expense has been recorded for the years ended September 30, 2020, 2019, and 2018:

Year Ended September 30,

2020 2019 2018

Educational services and facilities $ 64 $ — $ —

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Income tax benefit $ 519 $ 360 $ 466

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Stock Options

We issued stock options with exercise prices equal to the closing price of our stock on the grant date and which vested upon issuance.

We issue stock options with exercise prices equal to the closing price of our stock on the grant date and which vest upon issuance.

The expiration date of stock options granted under the 2003 Plan is the earlier of the seven or ten-year anniversary of the grant date, based on the terms of the individual grant;

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In determining our expected term, we have reviewed our historical share option exercise experience and determined it does not provide a reasonable basis upon which to estimate an expected term due to our limited historical award and exercise experience.

For the year ended September 30, 2019, we assumed the life of the options to be the term of the grant.

Therefore, we have historically assumed the life of the options to be the term of the grant.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

We determine the risk-free interest rate of our awards using the implied yield currently available for zero-coupon U.S.

Government issues with a remaining term equal to the expected life of the options.

The expected volatility considers the volatility of the Company common stock that has been traded for a period commensurate with the expected life.

The expected volatility considers the volatility of the Company’s common stock that has been traded for a period commensurate with the expected life.

The expected term of options granted represents the period of time that options granted are expected to be outstanding based on historical experience.

We have used an expected dividend yield of zero in the Black-Scholes option pricing model.

The following table summarizes the weighted average assumptions used for stock option grants made during the year ended September 30, 2019.

We did not grant stock options during the years ended September 30, 2020 and 2018.

We granted 210,000 stock options during the year ended September 30, 2019.

The following assumptions were used to value options granted during the year ended September 30, 2019:

Year Ended September 30, 2019

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Expected dividends — %

The following table summarizes stock option activity under the 2003 Plan for the years ended September 30, 2020, 2019 and 2018:

Shares Weighted

Price Weighted

Life Aggregate

(In thousands) (per Share) (Years)

Outstanding as of September 30, 2017 — $ — — $ —

Outstanding as of September 30, 2018 — $ — — $ —

Granted 210 $ 3.14

Exercised — $ —

Forfeited — $ —

Outstanding as of September 30, 2019 210 $ 3.14 6.19 $ 483

Granted — $ —

Exercised — $ —

Forfeited — $ —

Outstanding as of September 30, 2020 210 $ 3.14 5.18 $ 407

Stock options exercisable as of September 30, 2020 210 $ 3.14 5.18 $ 407

As of September 30, 2020, there was no unrecognized stock-based compensation expense related to stock options.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

The following table summarizes stock option activity under the 2003 Plan:

Average Exercise

(In thousands)

(In thousands, except per share amounts)

Restricted Stock Units and Performance Units

The following table summarizes the activity for restricted stock units and performance units granted under the 2003 Plan for the years ended September 30, 2020, 2019 and 2018:

(In thousands) Weighted Average

per Share Number of

(In thousands) Weighted Average

Outstanding as of September 30, 2017 523 $ 3.71 132 $ 3.11

Stock options granted

Stock options exercised

Stock options forfeited

Granted 350 $ 2.90 182 $ 2.40

Vested ( 206 ) $ 4.51 — $ —

Forfeited ( 95 ) $ 3.55 ( 36 ) $ 2.74

Outstanding as of September 30, 2018 572 $ 2.95 278 $ 2.69

Stock options exercisable as of September 30, 2019

Stock options expected to vest as of September 30, 2019

As of September 30, 2019, there was no unrecognized stock compensation expense related to stock options.

Restricted Stock Awards

Our restricted stock awards are issued at fair market value, which is based on the closing prices of our stock on the grant date, discounted for non-participation in anticipated dividends during the vesting period.

The restrictions on these awards generally lapse ratably over a four or five year period based on the terms of the individual grant.

The restrictions associated with our restricted stock awarded under the 2003 Plan will lapse upon the death, disability, or if, within one year following a change of control, employment is terminated without cause or for good reason.

If employment is terminated for any other reason, all shares of restricted stock shall be forfeited upon termination.

As of September 30, 2019 , there was no unrecognized stock compensation expense related to restricted stock awards.

There were no restricted stock awards granted during the years ended September 30, 2019 , 2018 or 2017 .

Granted — $ — — $ —

Adjustment to September 2017 grant based on achieved attainment level — $ — 23

Vested ( 228 ) $ 3.17 ( 108 ) $ 3.11

Forfeited ( 108 ) $ 2.96 ( 60 ) $ 2.75

Outstanding as of September 30, 2019 236 $ 2.74 133 $ 2.40

Granted 306 $ 7.46 314 $ 7.72

Adjustment to September 2017 grant based on achieved attainment level — $ — 33

Vested ( 141 ) $ 2.62 ( 100 ) $ 2.32

Forfeited ( 63 ) $ 2.96 ( 39 ) $ 2.48

Outstanding as of September 30, 2020 338 $ 7.01 341 $ 7.30

Restricted Stock Units

Our restricted stock units are issued at fair market value, which is based on the closing prices of our stock on the grant date, discounted for non-participation in anticipated dividends during the vesting period.

The restrictions on these units generally lapse ratably over a four or five year period based on the terms of the individual grant.

The restrictions on these units generally lapse ratably over a three or four year period based on the terms of the individual grant.

The restrictions associated with our restricted stock units awarded under the 2003 Plan will lapse upon the death, disability, or if, within one year following a change of control, employment is terminated without cause or for good reason.

If employment is terminated for any other reason, all shares of restricted stock shall be forfeited upon termination.

UNIVERSAL TECHNICAL INSTITUTE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

The following table summarizes restricted stock unit activity under the 2003 Plan:

Number of Shares

(In thousands)

Weighted Average

Nonvested restricted stock units outstanding as of September 30, 2018

Restricted stock units awarded

Restricted stock units vested

Restricted stock units forfeited

Nonvested restricted stock units outstanding as of September 30, 2019

As of September 30, 2019 , unrecognized stock compensation expense related to restricted stock awards was $0.3 million which is expected to be recognized over a weighted average period of 0.9 years .

The following table summarizes the weighted average fair values of the restricted stock units granted:

Year Ended September 30,

Weighted average grant date fair value per share

There was no assumed quarterly dividend rate for restricted stock units granted during the years ended September 30, 2019 , 2018 and 2017 due to the elimination of the quarterly cash dividend by our Board of Directors on June 9, 2016.

As of September 30, 2020, unrecognized stock compensation expense related to restricted stock units was $ 1.8 million which is expected to be recognized over a weighted average period of 2.4 years.

Performance Units

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We estimate the fair value of performance units using a Monte Carlo simulation which requires assumptions for expected volatility, risk-free rates of return, and dividend yields.

Expected volatilities are derived using a method that calculates historical volatility over a period equal to the length of the measurement period for UTI.

Expected volatilities are derived using a method that calculates

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

historical volatility over a period equal to the length of the measurement period for UTI.

We use a risk-free rate of return that is equal to the yield of a zero-coupon U.S.

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If an employee is terminated without cause or leaves for good reason within one year following certain changes in control, a determination of whether, and to what extent the performance condition has been achieved will be based on actual performance against the stated criteria through the separation date.

If an employee is terminated without cause or leaves for good reason after the one-year anniversary of certain changes in control,

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

the participant will receive a pro-rated number of performance units reflecting actual performance through the separation date and the number of complete twelve-month periods of the performance period during which the participant was employed.

If an employee is terminated without cause or leaves for good reason after the one-year anniversary of certain changes in control, the participant will receive a pro-rated number of performance units reflecting actual performance through the separation date and the number of complete twelve-month periods of the performance period during which the participant was employed.

If employment is terminated for any other reason, all unvested performance units shall be forfeited upon termination.

The September 2017 grant included a measurement period of 24 months.

When the September 2017 grant vested in September 2019, the attainment percentage exceeded 100%.

As a result, approximately 23,000 shares were granted to eligible employees.

The December 2017 grant included a two-year or three-year performance period wherein performance is measured by compound annual total shareholder return (“TSR”) calculated based on the 30-day trading average closing stock price at the beginning and the end of the performance period.

The performance will reflect stock price appreciation and any dividends paid on common stock (excludes preferred stock dividends).

Generally, we expect the performance period for annual performance-based awards to be three years in length.

However, the timing of recent grants required a two-year performance period to bridge from the former four-year graded vesting to a three-year cliff vesting.

The performance units do not have voting rights or rights to dividends.

Compensation expense for the performance units is recognized over the requisite period.

All compensation expense for the grant will be recognized for participants who fulfill the requisite service period, regardless of whether the performance condition for issuing shares is satisfied.

The following table summarizes performance unit activity under the 2003 Plan:

Number of Shares

(In thousands)

Weighted Average

Nonvested performance units outstanding as of September 30, 2018

Performance units awarded

Adjustment to September 2017 grant based on the achieved attainment level

Performance units vested

Performance units forfeited

Nonvested performance units outstanding as of September 30, 2019

As of September 30, 2019, unrecognized stock compensation expense related to performance units was less than $0.1 million , which is expected to be recognized over a weighted average period of 1.1 years .

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Earnings per Share

Basic net loss per share has historically been calculated by dividing net loss attributable to common stock by the weighted average number of common shares outstanding for the period.

As of September 30, 2020, unrecognized stock compensation expense related to performance units was $ 1.6 million, which is expected to be recognized over a weighted average period of 1.4 years.

Note 17 - Earnings per Share

We calculate basic earnings per share pursuant to the two-class method as a result of the issuance of the Series A Preferred Stock on June 24, 2016.

Our Series A Preferred Stock is considered a participating security because, in the event that we pay a dividend or make a distribution on the outstanding common stock, we shall also pay each holder of the Series A Preferred Stock a dividend on an as-converted basis.

As such, for periods subsequent to the issuance of the Series A Preferred Stock, we calculated basic earnings per share pursuant to the two-class method.

The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividend and participation rights in undistributed earnings.

Under this method, all earnings, distributed and undistributed, are allocated to common shares and participating securities based on their respective rights to receive dividends.

The Series A Preferred Stock is not included in the computation of basic earnings (loss) per share in periods in which we have a net loss, as the Series A Preferred Stock is not contractually obligated to share in our net losses.

The two-class method was not applicable for the years ended September 30, 2019 , 2018 and 2017.

Diluted net loss per share is calculated using the more dilutive of the as-converted or the two-class method.

The two-class method assumes conversion of all potential shares other than the participating securities.

The Series A Preferred Stock is not included in the computation of basic earnings per common share in periods in which we have a net loss as the Series A Preferred Stock is not contractually obligated to share in our net losses.

Diluted earnings per common share is calculated using the more dilutive of the two-class method or as-converted method.

The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the participating securities.

The as-converted method uses net income and assumes conversion of all potential shares including the participating securities.

Dilutive potential common shares include outstanding stock options, unvested restricted share awards and units and convertible preferred stock.

For the years ended September 30, 2019 , 2018 and 2017 , diluted loss per share equaled basic loss per share as the assumed activity related to outstanding stock-based grants would have an anti-dilutive effect.

The following table summarizes the computation of basic and diluted earnings (loss) per share under the as-converted method:

The basic and diluted weighted average shares outstanding are the same for years ended September 30, 2019 and 2018 as a result of the net loss available to common shareholders and anti-dilutive impact of the potentially dilutive securities.

The following table summarizes the computation of basic and diluted earnings per common share under the two-class or as-converted method, as well as the anti-dilutive shares excluded:

Year Ended September 30,

Loss available for distribution

Weighted average number of shares

Basic shares outstanding

Dilutive effect related to employee stock plans

Diluted shares outstanding

Net loss per share - basic

Net loss per share - diluted

2020 2019 2018

Basic earnings per common share:

Net income (loss) $ 8,008 $ ( 7,868 ) $ ( 32,682 )

Preferred stock dividend declared ( 5,264 ) ( 5,250 ) ( 5,250 )

Income (loss) available for distribution 2,744 ( 13,118 ) ( 37,932 )

Income allocated to participating securities ( 1,135 ) — —

Net income (loss) available to common shareholders $ 1,609 $ ( 13,118 ) $ ( 37,932 )

UNIVERSAL TECHNICAL INSTITUTE, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

The following table summarizes the potential weighted average shares of common stock that were excluded from the determination of our diluted shares outstanding as they were anti-dilutive:

(In thousands, except per share amounts)

Year Ended September 30,

(In thousands)

2020 2019 2018

Weighted average basic shares outstanding 29,812 25,438 25,115

Basic income (loss) per common share $ 0.05 $ ( 0.52 ) $ ( 1.51 )

Diluted earnings per common share:

Two-class Two-class Two-class

Net income (loss) available to common shareholders $ 1,609 $ ( 13,118 ) $ ( 37,932 )

Weighted average basic shares outstanding 29,812 25,438 25,115

Dilutive effect related to employee stock plans 301 — —

Weighted average diluted shares outstanding 30,113 25,438 25,115

Diluted income (loss) per common share $ 0.05 $ ( 0.52 ) $ ( 1.51 )

Anti-dilutive shares excluded:

Outstanding stock-based grants 14 733 334

Convertible preferred stock 21,021 21,021 21,021

Defined Contribution Employee Benefit Plan

Total anti-dilutive shares excluded 21,035 21,754 21,355

Dilutive shares under the as-converted method (1)

51,134 46,971 46,382

(1) The dilutive shares under the as-converted method assume conversion of the preferred stock and are presented here merely for reference.

In a net income position, diluted earnings per share is determined by the more dilutive of the two-class method or the as-converted method.

Note 18 - Defined Contribution Employee Benefit Plan

We sponsor a defined contribution 401(k) plan, under which our employees elect to withhold specified amounts from their wages to contribute to the plan and we have a fiduciary responsibility with respect to the plan.

1 unchanged sentence

All contributions and matches by us are invested at the direction of the employee in one or more mutual funds or cash.

We made matching contributions of approximately $1.0 million , $1.0 million and $0.9 million for the years ended September 30, 2019 , 2018 and 2017 , respectively.

UNIVERSAL TECHNICAL INSTITUTE, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

Segment Information

We made matching contributions of approximately $ 1.0 million for the years ended September 30, 2020, 2019 and 2018.

Note 19 - Segment Information

Our principal business is providing postsecondary education.

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Corporate expenses are allocated to Postsecondary Education and the Other category based on compensation expense.

Depreciation and amortization includes amortization of assets subject to financing obligation.

Depreciation and amortization includes amortization of assets subject to finance leases or financing obligations.

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Summary information by reportable segment is as follows:

Postsecondary Education Other Consolidated

Year Ended September 30, 2020

Postsecondary education

Intersegment eliminations

Revenues $ 287,195 $ 13,566 $ 300,761

Loss from operations ( 3,493 ) ( 378 ) ( 3,871 )

Postsecondary education

Depreciation and amortization (1)

Postsecondary education

11,698 106 11,804

Net income (loss) 8,386 ( 378 ) 8,008

Postsecondary education

Year Ended September 30, 2019

Revenues 316,589 14,915 331,504

Loss from operations ( 6,685 ) ( 1,117 ) ( 7,802 )

Depreciation and amortization (1)

15,747 157 15,904

Net loss ( 7,149 ) ( 719 ) ( 7,868 )

Year Ended September 30, 2018

Revenues 300,753 16,212 316,965

Loss from operations ( 31,707 ) ( 3,568 ) ( 35,275 )

Depreciation and amortization (1)

14,978 710 15,688

Net loss ( 29,713 ) ( 2,969 ) ( 32,682 )

As of September 30, 2020

Postsecondary education

Total assets 435,144 6,837 441,981

As of September 30, 2019

Total assets 263,974 6,552 270,526

(1) Excludes depreciation of training equipment obtained in exchange for services of $ 1.3 million, $ 1.4 million and $ 1.4 million for the years ended September 30, 2020, 2019 and 2018, respectively.

Note 20 - Government Regulation and Financial Aid

Our institutions are subject to extensive regulatory requirements imposed by a wide range of federal and state agencies, as well as by institutional and programmatic accreditors.

These requirements, which are frequently being revisited, revised, and expanded, cover virtually every aspect of our schools’ operations, and our institutions are subject to periodic audits and program compliance reviews by various external agencies for compliance with these requirements.

Each of our institutions’ administration of the federal programs of student financial assistance under Title IV of the HEA (“Title IV Programs”) also must be audited annually by independent accountants and the resulting audit report submitted to ED for review.

The approvals granted by these regulatory entities permit our schools to operate and to participate in a variety of government-sponsored financial aid programs, including Title IV Programs.

If our institutions fail to comply with any of these regulatory requirements, our regulators could take an array of adverse actions, up to and including revocation of the approval granted by the agency.

Such adverse actions could have a material adverse effect on our academic or operational initiatives, cash flows, results of operations, or financial condition.

Below, we discuss certain, specific elements of this regulatory environment.

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Government Regulation and Financial Aid

Our institutions participate in a variety of government-sponsored financial aid programs that assist students in paying their cost of education.

The largest source of such support is the federal programs of student financial assistance under Title IV of the HEA.

This support, commonly referred to as Title IV Programs, is administered by ED.

To participate in Title IV Programs, an institution must be authorized to offer its programs of instruction by relevant state education agencies, be accredited by an accrediting commission recognized by ED and be certified as an eligible institution by ED.

To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, the Reserve Education Assistance Program (REAP) and VA Vocational Rehabilitation, an institution must comply with certain requirements applicable to the programs.

Additionally, certain states and their attorneys general have additional requirements to operate our institutions or for our students to receive state funding.

Furthermore, we are subject to oversight by other federal agencies including the Consumer Financial Protection Bureau (CFPB), the SEC, the Federal Trade Commission, the Internal Revenue Service and the Departments of Veterans Affairs, Defense, Treasury, Labor and Justice.

For these reasons, our institutions are subject to extensive regulatory requirements imposed by all of these entities.

The Program Participation Agreement (PPA) document serves as ED’s formal authorization of an institution and its associated additional locations to participate in Title IV Programs for a specified period of time.

We received a fully recertified PPA for Universal Technical Institute of Texas in April 2018, which will expire March 31, 2022.

In November 2018, we received a fully recertified PPA for Universal Technical Institute of Arizona and a fully recertified PPA for Universal Technical Institute of Phoenix.

Both of the PPA's will expire on March 31, 2022.

(In thousands, except per share amounts)

State Authorization

Each of our institutions must be authorized by the applicable state education agency where the institution is located to operate and offer a postsecondary education program to its students.

Our institutions are subject to extensive, ongoing regulation by each of these states.

Additionally, our institutions are required to be authorized by the applicable state education agencies of certain other states in which our institutions recruit students.

Currently, each of our institutions is authorized by the applicable state education agency or agencies.

To operate and offer postsecondary programs, and to be certified to participate in Title IV Programs, each of our institutions must obtain and maintain authorization from the state in which it is physically located (“Home State”).

To engage in recruiting activities outside of its Home State, each institution also may be required to obtain and maintain authorization from the states in which it is recruiting students.

The level of regulatory oversight varies substantially from state to state and is extensive in some states.

State laws typically establish standards for instruction, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting, student outcomes reporting, disclosure obligations to students, limitations on mandatory arbitration clauses in enrollment agreements, financial operations and other operational matters.

State laws and regulations may limit our ability to offer educational programs and to award certificates, diplomas or degrees.

Some states prescribe standards of financial responsibility that are not consistent with those required by ED and some mandate that institutions post surety bonds.

Currently, we have posted surety bonds on behalf of our institutions and admissions representatives with multiple states of approximately $21.1 million.

Some states have added regulations that impose additional requirements on our schools and increase the complexity of existing requirements.

Other states have added, or may add in the future, new or more complex requirements applicable to our institutions, but we cannot predict the timing, content or impact of any such requirements.

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State laws may establish standards for instruction, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting, student outcomes reporting, disclosure obligations to students, limitations on mandatory arbitration clauses in enrollment agreements, financial operations, and other operational matters.

Some states prescribe standards of financial responsibility and mandate that institutions post surety bonds.

Many states have requirements for institutions to disclose institutional data to current and prospective students, as well as to the public.

And some states require that our schools meet prescribed performance standards as a condition of continued approval.

Accreditation

Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing qualitative reviews by an organization of peer institutions.

Accrediting commissions examine the academic quality of the institution’s instructional programs, and a grant of accreditation is generally viewed as confirmation that the institution’s programs meet generally accepted academic standards and practices.

Accrediting commissions also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources necessary to perform its educational mission, implement continuous improvement processes and support student success.

Accreditation by an ED-recognized commission is required for an institution to be certified to participate in Title IV Programs.

In order to be recognized by ED, accrediting commissions must adopt specific standards for their review of educational institutions.

All of our institutions are accredited by the Accrediting Commission of Career Schools and Colleges, an accrediting commission recognized by ED.

An accrediting commission may place an institution on reporting status to monitor one or more specified areas of performance in relation to the accreditation standards.

An institution placed on reporting status is required to report periodically to the accrediting commission on that institution’s performance in the area or areas specified by the commission.

Regulation of Federal Student Financial Aid Programs

To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant state education agencies, be accredited by an accrediting commission recognized by ED and be certified as eligible by ED.

ED will certify an institution to participate in Title IV Programs only after the institution has demonstrated compliance with the HEA and ED’s extensive regulations regarding institutional eligibility.

An institution must also demonstrate its compliance to ED on an ongoing basis.

Institutional accreditation by an ED-recognized accreditor is required for an institution to be certified to participate in Title IV Programs.

All of our institutions are accredited by the Accrediting Commission of Career Schools and Colleges (“ACCSC”), which is an accrediting agency recognized by ED.

ACCSC reviews the academic quality of each institution’s instructional programs, as well as the administrative and financial operations of the institution to ensure that it has the resources necessary to perform its educational mission, implement continuous improvement processes, and support student success.

Our institutions must submit annual reports, and at times, supplemental reports, to demonstrate ongoing compliance and improvement.

ACCSC requires institutions to disclose certain institutional information to current and prospective students, as well as to the public, and requires that our schools and programs meet various performance standards as a condition of continued accreditation.

Institutions must periodically renew their accreditation by completing a comprehensive renewal of accreditation process.

Title IV Programs

The federal government provides a substantial part of its support for postsecondary education through Title IV Programs in the form of grants and loans to students who can use those funds at any institution that has been certified as eligible to participate by ED.

All of our institutions are certified to participate in Title IV Programs.

Congress has historically focused on for-profit education institutions, specifically regarding participation in Title IV Programs and U.S.

DOD oversight of tuition assistance for military service members attending for-profit colleges.

Continued Congressional activity could result in the enactment of more stringent legislation by Congress, further rulemakings affecting participation in Title IV Programs and other governmental actions, increasing regulation of the for-profit sector.

Action by Congress may also increase our administrative costs and require us to modify our practices in order for our institutions to comply with Title IV Program requirements.

In addition, concerns generated by this Congressional activity may adversely affect enrollment in for-profit educational institutions such as ours.

Significant factors relating to Title IV Programs that could adversely affect us include the following:

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Gainful Employment

As described in our 2018 Annual Report on Form 10-K filed with the SEC on November 30, 2018, ED’s gainful employment regulations include debt to earning (DE) metrics and disclosure requirements for program certifications, reporting and disclosure of program information and warnings.

On July 1, 2019, ED issued final regulations that rescind the gainful employment regulations.

The final regulations have an effective date of July 1, 2020.

However, ED stated in a June 28, 2019 electronic announcement that institutions may elect to immediately implement the new regulations.

Institutions that early implement the regulations will not be required to:

report gainful employment data for the 2018-2019 award year;

comply with requirements for including a gainful employment disclosure template in their promotional materials or for directly distributing the disclosure template to prospective students;

post gainful employment disclosures on their web pages or comply with certification requirements for gainful employment.

ED stated in the electronic announcement that institutions that do not early implement the new regulations are expected to comply with the existing gainful employment regulations by July 1, 2020.

We have early implemented the new regulations.

Defense to Repayment Regulations

The current regulations on defense to repayment were published on November 1, 2016, with an effective date of July 1, 2017.

On October 24, 2017, ED published an interim regulation that delayed until July 1, 2018, the effective date of the majority of the regulations.

On February 14, 2018, a final rule was published in the Federal Register delaying until July 1, 2019 the effective date of the regulations.

On September 12, 2018, a U.S.

District Court judge issued an opinion concluding, among other things, that the delay in the effective date was unlawful.

On October 16, 2018, the judge issued an order declining to extend a stay preventing the regulations from taking effect.

Consequently, the November 1, 2016 regulations are now in effect.

The Department held negotiated rulemaking sessions beginning in November 2017 and ending in February 2018, with the objective of modifying the defense to repayment regulations.

However, no consensus was reached on the proposed regulations.

ED subsequently published a notice of proposed rulemaking on July 31, 2018 that included the proposed regulations for public comment.

On September 23, 2019, ED published the final regulations.

The final regulations have a general effective date of July 1, 2020.

The Department has not authorized institutions to early implement the new regulations prior to July 1, 2020 with the exception of certain financial responsibility regulations related to operational leases and long-term debt.

Consequently, we generally will remain subject to the current regulations until the new regulations take effect on July 1, 2020.

Closed School Loan Discharges

ED regulations state that ED may discharge a borrower’s obligation to repay certain Title IV loans if the borrower (or the student on whose behalf a parent borrowed) did not complete the program of study for which the loan was made because the campus at which the borrower (or student) was enrolled closed.

The borrower may qualify for a discharge by submitting a request to ED and meeting specific requirements in the regulations.

Borrowers generally may qualify for a discharge if they were enrolled at the campus at the time it closed, or if they were enrolled not more than 120 days before the campus closed, and if they did not complete their educational program through a teach-out at another school or by transferring academic credits earned at the closed school to another school.

ED has the authority to extend the 120-day period for extenuating circumstances.

If ED discharges the loans, ED may seek to recover from the school or other related parties the amount of loans discharged and to impose other liabilities and penalties.

Consequently, if we close a campus, ED could discharge borrower obligations to repay certain Title IV - either on its own initiative or upon application by the borrower - loans in connection with loans received by all students enrolled in the campus at the time of its closure and by all students who withdrew from the campus 120 days (or a longer period established by ED) prior to the closure and seek to recover the amount of the discharged loans and other liabilities and penalties.

We may be able to mitigate these losses by

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conducting or arranging for an orderly teach-out of students at a closed campus, but these efforts could be unsuccessful if students decline to participate in the teach-out or transfer their credits to another school or if they fail to complete their programs.

ED published new regulations on September 23, 2019 that included proposed regulations on a variety of topics, including amendments to regulations related to the discharge of student loans based on the school’s closure or a false claim of high school completion under certain circumstances.

The new regulations take effect on July 1, 2020, and apply to loans first disbursed on or after July 1, 2020.

Among other things, the new regulations allows students to obtain a discharge if, among other requirements, they were enrolled not more than 180 days before the campus closed.

ED has the authority to extend the 180-day period for extenuating circumstances.

The borrower also must certify that the student has not accepted the opportunity to complete, or is not continuing in, the program of study or comparable program through either an institutional teach-out plan performed by the school or a teach-out agreement at another school, approved by the school’s accrediting agency and, if applicable, state licensing agency.

ED also has the authority to discharge on its own initiative the loans of qualified borrowers without a borrower application if the borrower did not subsequently re-enroll in any Title IV eligible institution within three years from the date the school closed.

The September 23, 2019 regulations limit this authority to schools that close between November 1, 2013 and July 1, 2020.

On February 18, 2019, we announced that our campus in Norwood, Massachusetts is no longer accepting new student applications, and its last class group of students started on March 18, 2019.

The campus is expected to close before the end of fiscal year 2020, after the July 1, 2020 effective date of the regulations.

We intend to teach out all of the students currently enrolled at the campus, although certain students may elect to withdraw before graduation, and we cannot predict the number of any students who might withdraw prior to the closure of the campus and potentially qualify for a loan discharge.

A for-profit institution loses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue from Title IV Programs for two consecutive fiscal years as calculated under a cash basis formula mandated by ED.

The HEA and ED regulations set forth specific requirements for the calculation of the Title IV Program revenue percentage, mandate expanded disclosure requirements in how an institution presents the calculation and impose negative consequences if an institution exceeds the 90% limit in a single fiscal year.

The HEA provides that an institution will lose its Title IV Program eligibility for a period of at least two institutional fiscal years if it exceeds the 90% threshold for two consecutive institutional fiscal years.

The loss of such eligibility would begin on the first day following the conclusion of the second consecutive year in which the institution exceeded the 90% limit and, as such, any Title IV Program funds already received by the institution and its students during a period of ineligibility would have to be returned to ED or a lender, if applicable.

Additionally, if an institution exceeds the 90% level for a single year, ED will place the institution on provisional certification for a period of at least two years, could impose other restrictions or conditions on the institution's Title IV eligibility, and, under ED’s current financial responsibility regulations, could conclude that the institution lacks financial responsibility and is required to submit a letter of credit or other form of financial protection.

The HEA sets specific standards for certain elements in the calculation of an institution’s percentage under the 90/10 Rule, including, among other things, the treatment of institutional loans and revenue received from students who are enrolled in educational programs that are not eligible for Title IV Program funding.

For the year ended September 30, 2019 , approximately 71% of our revenues, on a cash basis, were derived from funds distributed under Title IV Programs, as calculated under the 90/10 rule.

In fiscal 2020, we derived approximately 66 % of our revenues, on a cash basis as defined by ED, from Title IV Programs.

Significant factors relating to Title IV Programs that could adversely affect us include:

• The 90/10 Rule .

As a condition of participation in Title IV Programs, proprietary institutions must agree when they sign their PPA to derive at least 10% of their revenues for each fiscal year from sources other than Title IV Program funds.

A proprietary institution is subject to sanctions if it exceeds the 90% level for a single year, and loses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue from Title IV Programs for two consecutive fiscal years.

As of September 30, 2020, our institutions’ annual Title IV percentages as calculated under the 90/10 rule ranged from approximately 65 % to 68 %.

• Administrative Capability .

To continue its participation in Title IV Programs, an institution must demonstrate that it remains administratively capable of providing the education it promises and of properly managing the Title IV Programs.

ED assesses the administrative capability of each institution that participates in Title IV Programs under a series of standards listed in the regulations, which cover a wide range of operational and administrative topics, including the designation of capable and qualified individuals, the quality and scope of written procedures, the adequacy of institutional communication and processes, the timely resolution of issues, the sufficiency of recordkeeping, and the frequency of findings of noncompliance, to name a few.

ED’s administrative capability standards also include thresholds and expectations for federal student loan cohort default rates (discussed below), satisfactory academic progress, and loan counseling.

Failure to satisfy any of the standards may lead ED to find the institution ineligible to participate in Title IV Programs, require the institution to repay Title IV Program funds, change the method of payment of Title IV Program

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Federal Student Loan Defaults

To remain eligible to participate in Title IV Programs, institutions must maintain federal student loan cohort default rates below specified levels.

ED calculates an institution’s cohort default rate on an annual basis.

Under the current calculation, the cohort default rate is derived from student borrowers who first enter loan repayment during a federal fiscal year (FFY) ending September 30 and subsequently default on those loans within the two following years;

parent borrowers are excluded from the calculation.

This represents a three-year measuring period.

An institution whose cohort default rate is 30% or more for three consecutive FFYs or greater than 40% for any given FFY loses eligibility to participate in some or all Title IV Programs.

This sanction is effective for the remainder of the FFY in which the institution lost its eligibility and for the two subsequent FFYs.

None of our institutions had a three-year cohort default rate of 30% or greater for 2016, 2015 or 2014, the three most recent FFYs with published rates.

Financial Responsibility Standards

All institutions participating in Title IV Programs must satisfy specific ED standards of financial responsibility.

ED evaluates institutions for compliance with these standards each year, based on the institution’s annual audited financial statements, as well as following a change of control of the institution.

Under current regulations and under regulations to take effect on July 1, 2020, ED may reevaluate the financial responsibility of an institution following the occurrence of certain triggering events.

The institution’s financial responsibility is measured in part by its composite score that is calculated by ED based on three ratios:

(In thousands, except per share amounts)

funds, or place the institution on provisional certification as a condition of its continued participation or take other actions against the institution.

• Three-Year Student Loan Default Rates.

To remain eligible to participate in Title IV Programs, institutions also must maintain federal student loan cohort default rates below specified levels.

An institution whose three-year cohort default rate is 15% or greater for any one of the three preceding years is subject to a 30-day delay in receiving the first disbursement on federal student loans for first-time borrowers.

As of September 30, 2020, only Universal Technical Institute of Texas was subject to a 30-day delay in receiving the first disbursement on federal student loans for first-time borrowers due to a three-year cohort default rate that was 15% or greater for one of the three most recent years.

The 30-day delay was lifted as of September 30, 2020 for Universal Technical Institute of Phoenix due to the three-year cohort default rate falling below 15%.

• Financial Responsibility.

All institutions participating in Title IV Programs also must satisfy specific ED standards of financial responsibility.

Among other things, an institution must meet all of its financial obligations, including required refunds to students and any Title IV Program liabilities and debts, be current in its debt payments, comply with certain past performance requirements, not receive an adverse, qualified, or disclaimed opinion by its accountants in its audited financial statements.

Each year, ED also evaluates institutions’ financial responsibility by calculating a “composite score,” which utilizes information provided in the institutions’ annual audited financial statements.

The composite score is based on three ratios:

(1) the equity ratio which measures the institution’s capital resources, ability to borrow and financial viability;

(2) the primary reserve ratio which measures the institution’s ability to support current operations from expendable resources;

the net income ratio which measures the institution’s ability to operate at a profit.

ED assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength.

ED then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution.

The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight.

In addition to having an acceptable composite score, an institution must, among other things, meet all of its financial obligations including required refunds to students and any Title IV Program liabilities and debts, be current in its debt payments, comply with certain past performance requirements, not receive an adverse, qualified, or disclaimed opinion by its accountants in its audited financial statements, and not be subject to financial triggering events.

If ED determines that an institution does not satisfy its financial responsibility standards, depending on the resulting composite score and other factors, that institution may establish its financial responsibility on an alternative basis.

If an institution's composite score is below 1.5, but is at least 1.0, the institution is in a category classified by ED as the zone.

Under ED regulations, institutions in the zone solely because their composite score is less than 1.5 are still considered to be financially responsible, but require additional oversight by ED in the form of cash monitoring and other participation requirements.

Institutions in the zone typically are permitted by ED to continue to participate in the Title IV programs under one of two alternatives:

1) the “Zone Alternative” under which an institution is required to make disbursements to students under a payment method other than ED’s standard

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repayment, typically the Heightened Cash Monitoring 1 (HCM1) payment method;

to notify ED within 10 days after the occurrence of certain oversight and financial events and to comply with other operating conditions imposed by ED or 2) submit a letter of credit to ED equal to at least 50 percent of the Title IV funds received by the institutions during the most recent fiscal year.

ED permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years.

Under the current regulations that are in effect until July 1, 2020, the list of information that an institution must provide timely to ED under the “Zone Alternative” includes, in addition to the events described under the financial protection measures and any other events that ED might require, any event that causes the institution, or a related entity, to realize any liability that was noted as a contingent liability in the institution’s or related entity’s most recent audited financial statements or any losses that are unusual in nature and infrequently occur or both as defined in accordance with certain specified accounting standards.

The institution also would be required to notify ED of certain other events described in the current Defense to Repayment regulations.

ED could impose a letter of credit or other conditions or requirements upon us in response to the reporting of any oversight or financial events.

Under the HCM1 payment method, the institution is required to make Title IV disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from ED.

As long as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw down funds through ED’s electronic system for grants management and payments for the amount of disbursements made to eligible students.

Unlike the Heightened Cash Monitoring 2 (HCM2) or reimbursement payment methods, the HCM1 payment method typically does not require institutions to submit documentation to ED and wait for ED approval before drawing down Title IV funds.

ED may place an institution that is in the zone on the HCM2 or reimbursement methods of payment.

An institution on the HCM1, HCM2 or reimbursement payment methods must pay any credit balances due to a student or parent before drawing down funds from ED for the amount of disbursements made to the student or parent.

If an institution's composite score or recalculated composite score is below 1.0, the institution is considered by ED to lack financial responsibility.

If ED determines that an institution does not satisfy ED's financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibility on an alternative basis by, among other things:

posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during its most recently completed fiscal year, or

posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting provisional certification for a period of no more than three years, complying with additional ED notification and operating requirements and conditions and agreeing to receive Title IV Program funds under an arrangement other than ED's standard advance funding arrangement.

If an institution is unable to establish financial responsibility on an alternative basis, the institution may be subject to financial penalties, restrictions on operations and loss of external financial aid funding.

If an institution does not establish its financial responsibility by the end of the period for which ED provisionally certified the institution, ED may continue to provisionally certify the institution, but may require one or more persons or entities that exercise substantial control over the institution, as defined by ED regulations, to provide ED with financial protection for an amount determined by ED and to be jointly and severally liable for any liabilities that may arise from the institution’s participation in the Title IV programs.

The current regulations that are in effect until July 1, 2020, expanded the list of actions or events that require an institution to provide ED with a letter of credit or other form of acceptable financial protection.

and (3) the net income ratio which measures the institution’s ability to operate at a profit.

Between composite score calculations, ED also will reevaluate the financial responsibility of an institution following the occurrence of certain “triggering events,” which must be timely reported to the agency.

• Title IV Program Rulemaking.

ED is almost continuously engaged in one or more negotiated rulemakings, which is the process pursuant to which it revisits, revises, and expands the complex and voluminous Title IV Program regulations.

Recent and significant negotiated rulemakings include the Gainful Employment Rulemaking, the Borrower Defense to Repayment Rulemaking, and the Accreditation and Innovation Rulemaking.

New regulations associated with these rulemakings took effect on July 1, 2020.

We devote significant effort to understanding the effects of these regulations on our business and to developing compliant solutions that also are congruent with our business, culture, and mission to serve our students and industry relationships.

However, we cannot predict with certainty how these new and developing regulatory requirements will be applied or whether each of our schools will be able to comply with all of the requirements in the future.

Other Federal and State Student Aid Programs

Some of our students also receive financial aid from federal sources other than Title IV Programs, such as the programs administered by the VA, the Department of Defense (“DOD”) and under the Workforce Investment Act.

Additionally, some states provide financial aid to our students in the form of grants, loans or scholarships.

Our Long Beach, Rancho Cucamonga and Sacramento, California campuses, for example, are currently eligible to participate in the Cal Grant program.

All of our institutions must comply with the eligibility and participation requirements applicable to each of these funding programs, which vary by funding agency and program.

In 2020, we derived approximately 17 % of our revenues, on a cash basis, from veterans’ benefits programs, which include the Post-9/11 GI Bill, the Montgomery GI Bill, the Reserve Education Assistance Program (“REAP”) and VA Vocational Rehabilitation.

To continue participation in veterans’ benefits programs, an institution must comply with certain requirements established by the VA.

COVID-19 and the CARES Act

On March 13, 2020, the United States declared a national emergency concerning the COVID-19 pandemic, effective March 1, 2020.

ED, consistent with its authority under then-existing statutes and regulations, issued guidance on March 5, 2020, outlining a range of accommodations intended to address interruptions of study related to COVID-19.

On March 27, 2020, President Trump signed the CARES Act, which provides additional flexibilities and accommodations, beyond those offered

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regulations also, among other things, may increase the amount of the letter of credit or other form of financial protection that an institution must provide to ED if the institution has a composite score below 1.0, no longer qualifies for the Zone Alternative, or does not comply with other applicable requirements of the financial responsibility regulations.

The current regulations also would permit ED to recalculate an institution’s composite score to account for its estimate of actual or potential losses resulting from certain events identified in the new Defense to Repayment Regulations.

The regulations published on September 23, 2019 with an effective date of July 1, 2020 shorten and reduce the scope of the list of events that could result in ED determining the institution to fail ED’s financial responsibility standards and requiring a letter of credit or other form of acceptable financial protection and the acceptance of other conditions or requirements.

ED has historically evaluated the financial condition of our institutions on a consolidated basis based on the financial statements of Universal Technical Institute, Inc.

as the parent company.

ED’s regulations permit ED to examine the financial statements of Universal Technical Institute, Inc., the financial statements of each institution and the financial statements of any related party.

For our 2019 fiscal year, we calculated our composite score to be 1.8.

However, the composite score calculations and resulting requirements imposed on our institutions are subject to determination by ED once it receives and reviews our audited financial statements.

Return of Title IV Funds

An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing them.

The institution must return those unearned funds to ED or the appropriate lending institution in a timely manner, which is generally within 45 days from the date the institution determines that the student has withdrawn.

If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in the audit or program review sample, the institution must post a letter of credit in favor of ED in an amount equal to 25% of the total Title IV Program funds that should have been returned in the previous fiscal year.

Compliance with Regulatory Standards and Effect of Regulatory Violations

Our institutions are subject to audits and program compliance reviews by various external agencies, including ED, ED’s Office of Inspector General, state education agencies, student loan guaranty agencies, the VA and ACCSC, as well as other federal and state agencies.

Each of our institutions’ administration of Title IV Program funds must also be audited annually by independent accountants and the resulting audit report submitted to ED for review.

If ED or another regulatory agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the HEA or ED’s regulations, that institution could be required to repay such funds and could be assessed an administrative fine.

ED could also transfer the institution from the advance method of receiving Title IV Program funds to a cash monitoring or reimbursement system, which could negatively impact cash flow at an institution.

Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by ED to fine the affected institution or to limit, suspend or terminate the participation of the affected institution in Title IV Programs.

Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation.

Veterans' Benefits Programs

Since October 1, 2011, the Post-9/11 GI Bill has been effective for both degree and non-degree granting institutions of higher learning, allowing eligible veterans to use their Post-9/11 GI Bill benefits.

Additionally, veterans use benefits such as the Montgomery GI Bill, the REAP and VA Vocational Rehabilitation at our campuses.

We derived approximately 15% of our revenues, on a cash basis, from veterans' benefits programs in 2019.

(In thousands, except per share amounts)

by the ED in its March 5, 2020 guidance, particularly with regard to the campus-based assistance programs, the measurement of satisfactory academic progress and the return of unearned Title IV Program funds to ED.

Shortly thereafter, on April 3, 2020, ED issued further guidance, providing additional regulatory flexibilities, and in some cases, implementing the accommodations provided for in the CARES Act.

ED periodically updated and supplemented this guidance over the following months.

Guidance also has been published regarding immigration, discrimination, safety, and privacy issues, as well as the Higher Education Emergency Relief Fund (“HEERF”) established under the CARES Act.

We have reviewed and implemented many of the flexibilities created by the CARES Act and ED’s guidance, including the opportunity to temporarily offer distance education, discussed below.

We continue to review new guidance from ED and to implement available legislative and regulatory relief as applicable.

Distance Education

In response to the COVID-19 pandemic, ED provided broad approval for institutions to use distance learning modalities without going through the standard ED approval process for payment periods that begin on or before December 31, 2020.

ED also permitted accreditors to waive their distance review requirements.

ACCSC has granted institutions temporary approval to offer distance education through December 31, 2020 for the end of the emergency.

State agencies have also provided distance education flexibility, but the processes and expiration dates for temporary distance education approval vary by state, and states have been granting extensions to these temporary approvals as they approach expiration.

We have availed ourselves of this temporary flexibility in all our programs and we are in full compliance with all state and ACCSC requirements.

To afford us additional flexibility beyond the current temporary approval period(s), we have initiated the approval process with ACCSC, state agencies, or both to be able of offer distance education and a blended learning format for all of our programs on a more permanent basis.

Additionally, as a result of previously implementing our Tech II curriculum, we are currently approved to offer distance education at our Avondale, Arizona, Rancho Cucamonga, California, Sacramento, California, Orlando, Florida, Dallas-Ft.

Worth, Texas, Long Beach, California and Bloomfield, New Jersey campuses for our Automotive/Diesel Tech II programs by ACCSC, state agencies, or both.

Note 21 - Higher Education Emergency Relief Fund under the CARES Act

The CARES Act established the HEERF.

The HEERF includes approximately $ 14.0 billion in relief funds to be distributed directly to institutions of higher education.

The most significant portion of that funding allocation provides that $ 12.56 billion will be distributed to institutions using a formula based on student enrollment.

Of the amount allocated to each institution under this formula, at least 50% must be reserved to provide students with emergency financial aid grants to help cover expenses related to the disruption of campus operations due to coronavirus.

The remaining funds must be used “to cover any costs associated with significant changes to the delivery of instruction due to the coronavirus.”

In order to access the HEERF funds, institutions must complete two Funding and Certification Agreements (the “HEERF Agreements”), one for the emergency financial grants to students portion and the other for the institutional portion, which obligate the recipient to administer the funds in a manner that is consistent with the CARES Act and federal laws and regulations cited in the HEERF Agreements.

The HEERF Agreements also subject the recipient to a range of audit requirements, as well as quarterly and annual reporting requirements.

ED has emphasized that institutions should be prepared to report the use of the funds and to describe any internal controls the institution has in place to ensure that funds were used for allowable purposes and in accordance with cash management principles.

The agency also has encouraged institutions to keep detailed records of how they are expending all funds received under the HEERF.

A failure to administer the HEERF funds in accordance with applicable laws at regular intervals could result in a future repayment liability.

The allocations to the higher education institutions were set by a formula prescribed in the CARES Act, which is weighted significantly by the number of full-time students who are Pell-eligible, but also takes into consideration the total population of the school and the number of students who were not enrolled full-time online before the COVID-19 outbreak.

ED utilized the most recent data available from the Integrated Postsecondary Education Data System and Federal Student Aid for this

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

($’s in thousands, except per share amounts)

participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, the REAP, and VA Vocational Rehabilitation, an institution must comply with certain requirements established by the VA.

These criteria require, among other things, that the institution:

report on the enrollment status of eligible students;

maintain student records and make such records available for inspection;

follow current VA rules;

comply with applicable limits on the percentage of students receiving certain veterans benefits on a program or campus basis.

If we fail to comply with these requirements, we could lose our eligibility to participate in veterans' benefits programs.

The VA shares responsibility for VA benefit approval and oversight with designated State Approving Agencies (SAAs).

SAAs play a critical role in evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements.

Processes and approval criteria, as well as interpretation of applicable requirements, can vary from state to state.

Therefore, approval in one state does not necessarily result in approval in all states.

If we are unable to secure approvals in one or more states, or if the process for obtaining an approval takes significant time, we could be required to alter the delivery methodology or structure of the program or experience delays in or the loss of a portion of VA funding.

Students receiving VA funding may not have the same flexibility in scheduling their coursework.

The VA imposes limitations on the percentage of students per program receiving benefits under certain veterans’ benefits programs, unless the program qualifies for certain exemptions.

If the VA determines that a program is out of compliance with these limitations, the VA will continue to provide benefits to current students, but new students will not be eligible to use their veterans' benefits for an affected program until we demonstrate compliance.

Additionally, the VA requires a campus be in operation for two years before it can apply to participate in VA benefit programs.

With the exception of our newest Bloomfield, New Jersey campus, which opened in August 2018, all of our campuses are eligible to participate in VA education benefit programs.

During 2012, President Obama signed an Executive Order directing the DOD, Veterans Affairs and Education to establish “Principles of Excellence” (Principles), based on certain guidelines set forth in the Executive Order, to apply to educational institutions receiving federal funding for service members, veterans and family members.

As requested, we provided written confirmation of our intent to comply with the Principles to the VA in June 2012.

We are required to comply with the Principles to continue recruitment activities on military installations.

Additionally, there is a requirement to possess a memorandum of understanding (MOU) with the U.S.

DOD as well as with certain individual installations.

Our access to bases for student recruitment has become more limited due to recent changes in the Transition Assistance Program (Transition Goals, Plans, Success) and increased enforcement of the MOU requirement.

Each of our institutions has an MOU with the U.S.

We have MOUs with certain key individual installations and are pursuing MOUs at additional locations;

however, some installations will not provide MOUs to institutions that do not teach at the installation.

We continue to strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and rebuild our access to military installations.

(In thousands, except per share amounts)

In May 2020, we were granted approximately $ 33.0 million in HEERF funds for emergency grants to students and to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus.

HEERF Funds for Student Grants

Per the HEERF Agreements, at least 50% of HEERF funds received were to be used exclusively for emergency financial aid grants to students impacted by COVID-19, supporting their efforts to stay in school and continue their training toward graduation and future careers.

In May 2020, we received approximately $ 16.5 million designated for student grants and deposited these funds into a separate restricted cash account.

As of September 30, 2020, we have awarded all $ 16.5 million designated for student grants to approximately 9,000 students.

HEERF Funds for Significant Changes to the Delivery of Instruction Due to Coronavirus

In addition, in May of 2020 we were awarded approximately $ 16.5 million for the institutional portion of the HEERF funds.

Such funds may be used to provide additional emergency financial aid grants to students, to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus, or not used at all and returned to the government.

Per the CARES Act, the HEERF Agreements, and ED guidance, the following requirements are generally applicable to all allowable institutional costs:

• Funds may only be used to cover institutional costs associated with significant changes to the delivery of instruction due to the coronavirus.

• Costs must have been incurred on or after March 13, 2020.

• Funds must generally be spent one calendar year (365 days) from the date of award.

• The use of funds must be documented and reported.

As explained in the HEERF Agreements for the Institutional Portions, we have “discretion in determining how to allocate and use the funds provided under the CARES Act, provided the funds will be spent only on those costs for which Recipient has a reasoned basis for concluding such costs have a clear nexus to significant changes to the delivery of instruction due to the coronavirus.” Institutional costs that the ED has specifically designated as allowable include:

additional emergency grants to students;

reimbursements for refunds made to students for services the institution could no longer provide such as housing, food, room and board, and tuition;

technology costs including laptops, hotspots, and other information technology equipment and software to enable students to participate in distance learning;

qualified scholarships and payment for future academic terms;

payments to a third-party service provider or online program manager for each additional student using the distance learning platform;

purchases to ensure the physical safety of the students on campus;

and purchases of equipment or software, paying for online licensing fees, or paying for internet service to enable students to transition to distance learning as such costs are associated with a significant change in the delivery of instruction due to the coronavirus.

The ED has specifically prohibited costs related to pre-enrollment recruiting activities, endowments, capital outlays associated with facilities to athletics, sectarian instruction, or religious worship, executive compensation, investor benefits, and to pay student balances or student debt.

Prior to the COVID-19 crisis, the majority of our training programs were delivered exclusively through in-person instruction at our campus locations.

In order to allow our students to continue their education during the COVID-19 crisis, beginning on March 25, 2020, we shifted our predominantly on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs.

We incurred significant costs for the initial development and implementation of our online training program for students including software purchases, audio/video equipment purchases and labor hours to record the instructional videos and for training of faculty, and enhancements to the online student experience.

In May 2020, we resumed in-person labs at eight of our campus locations.

Four of our campuses resumed in-person labs in June 2020, and our final campus to resume in-person labs in Bloomfield, New Jersey opened on July 1, 2020.

On-campus labs have been re-designed or modified to meet the guidelines set by the CDC, as well as state and local jurisdictions for health, safety and social distancing.

In order to comply with these new guidelines, we incurred costs for sanitization supplies, partitions, labor hours and other related expenses to ensure safety and social distancing.

Additionally, we purchased laptops to provide to our students to assist their transition to the online blended

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($’s in thousands, except per share amounts)

Quarterly Financial Summary (Unaudited)

Year ended September 30, 2019

(In thousands, except per share amounts)

training model.

We also incurred costs as we continued to improve and enhance the delivery of our online instruction for students.

In total, we incurred approximately $ 15.1 million between March 15, 2020 and September 30, 2020 related to the changes in the delivery of instruction due to the coronavirus.

We have consulted with our outside regulatory counsel and believe that all of these costs are allowable expenses for the institutional HEERF funds under the CARES Act.

However, we cannot guarantee that ED will agree with our foregoing conclusion.

We have offset our total operating expenses by $ 15.1 million for the year ended September 30, 2020.

Of the $ 15.1 million, $ 13.3 million was recorded in “Educational services and facilities” and $ 1.8 million was recorded in “Selling, general and administrative” on the consolidated statement of operations for the year ended September 30, 2020.

Additionally, during the year ended September 30, 2020, we used $ 0.6 million of the institutional funds for additional emergency grants to our students.

Including the additional student grants, the total institutional funds spent during fiscal 2020 was $ 15.7 million.

As of September 30, 2020, we had drawn down $ 13.9 million of the institutional funds into our operating cash account as partial reimbursement for the $ 15.7 million of eligible costs incurred during the year ended September 30, 2020.

As of September 30, 2020, $ 2.7 million remained in our G5 account with the ED and is not included in our “Cash and cash equivalents” on our consolidated balance sheet.

We drew down the remaining $ 1.8 million for the eligible costs incurred during the year ended September 30, 2020 in October 2020.

As of September 30, 2020, there was approximately $ 0.8 million of institutional funds remaining to be used for allowable costs incurred after September 30, 2020, which are expected to be used during the first quarter of our fiscal 2021.

Note 22 - Quarterly Financial Summary (Unaudited)

Summarized quarterly financial information for fiscal 2020 and 2019 is as follows:

Year ended September 30, 2020 First

Revenues $ 87,234 $ 82,717 $ 54,483 $ 76,327 $ 300,761

Income (loss) from operations 4,254 ( 499 ) ( 13,779 ) 6,153 ( 3,871 )

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Earnings (loss) per share:

Year ended September 30, 2018

Loss from operations

Loss per share:

(1) During the three months ended March 31, 2016, we recorded a full valuation allowance on our deferred tax assets.

We will maintain a valuation allowance on our deferred tax assets until sufficient positive evidence exists to support its reversal.

See Note 12 for further discussion.

The summation of quarterly per share information does not equal amounts for the full year as quarterly calculations are performed on a discrete basis.

Basic $ 0.07 $ 0.18 $ ( 0.45 ) $ 0.10 $ 0.05

Diluted $ 0.07 $ 0.18 $ ( 0.45 ) $ 0.09 $ 0.05

Year ended September 30, 2019 First

Revenues $ 83,050 $ 81,746 $ 79,042 $ 87,666 $ 331,504

(Loss) income from operations ( 7,205 ) ( 5,580 ) ( 455 ) 5,438 ( 7,802 )

Net (loss) income ( 7,717 ) ( 5,263 ) ( 365 ) 5,477 ( 7,868 )

Earnings (loss) per share:

Basic $ ( 0.36 ) $ ( 0.26 ) $ ( 0.07 ) $ 0.09 $ ( 0.52 )

Diluted $ ( 0.36 ) $ ( 0.26 ) $ ( 0.07 ) $ 0.09 $ ( 0.52 )

The sum of quarterly per share information does not equal amounts for the full year as quarterly calculations are performed on a discrete basis.

Additionally, securities may have had an anti-dilutive effect during individual quarters but not for the full year.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures